How Will a Deed-in-Lieu Affect My Credit in California?

In 2010, California had the third highest foreclosure rate in the United States, with 1 out of out every 240 homes in foreclosure. Many of these homeowners choose to give the bank the deed to the home, or deed-in-lieu, instead of trying to pay the mortgage. However, if you choose a deed-in-lieu of foreclosure, it affects your credit the same way as in any other state.

Identification

A deed-in-lieu of foreclosure has the same impact on your credit score no matter where you live. Depending on your credit history and credit score before you completed the deed-in-lieu, your score drops anywhere from 85 to 160 points, according to Les Christie of CNN Money. A deed-in-lieu usually does a little less damage to a credit score than a foreclosure or short-sale, but it is essentially the same in the eyes of lenders.

Tax Lien

California has slightly more favorable credit reporting standards than most other states. For example, the bureaus can only report a lien for seven years after you pay it off or 10 years from the filing date. Unpaid tax liens can remain for 10 years. This is important, because your deed-in-lieu might result in tax consequences if you owe a deficiency balance. Your lender might be able to pursue a leftover mortgage balance after you trade in the property. If you cannot afford the tax on the canceled debt income when you file your taxes, the Internal Revenue Service will issue a tax lien against any of your property. California is a non-recourse state, so it does not allow lenders to pursue deficiency balances except in certain cases, such as a line of credit secured with the home.

Considerations

If you cannot handle a mortgage and it gets to the point where the bank accepts a deed-in-lieu of foreclosure, you probably already have numerous negative items and terrible credit. Thus, the deed-in-lieu likely does little to affect your credit score much. You might benefit more from a deed-in-lieu than most other options, because a deed-in-lieu of foreclosure happens more quickly than foreclosure and short-sales, which means you can start rebuilding your credit sooner.

Tip

Explore every option available before choosing a deed-in-lieu of foreclosure or anything that results in defaulting completely on your mortgage. Your bank might be able to offer a loan modification under the federal Making Home Affordable program. You could try to sell the home for an amount that covers your mortgage. Whatever you choose, ask your bank how it will report the account. Anything less than "paid as agreed" usually hurts your credit rating.