When behind on your mortgage payment, voluntarily surrendering the home may seem like the lesser of two evils compared to having the home foreclosed on. Giving a home back to the bank is known as a deed in lieu of foreclosure. The credit consequences associated with a deed in lieu are not always as devastating as a foreclosure, however it will have a negative impact on your credit score. Simply packing up and moving out does not let the lender know you want to give back the home. You must communicate with your bank to complete a deed in lieu of foreclosure.
Your credit will begin to suffer if you become delinquent on your mortgage. Payment history accounts for 35 percent of a credit score. Your score can decline with each missed payment. Consecutive missed payments will continue to hurt your score. Before approving a deed in lieu of foreclosure, lenders typically require you to attempt to sell the home in a short sale. In a short sale, the lender agrees to accept less than the balance remaining on your loan. If the home is on the market for a while, generally at least 90 days, without selling, the lender may consider a deed in lieu of foreclosure. Both a short sale and a deed in lieu of foreclosure release you from the mortgage debt. It is best to begin discussing options with your lender at the first sign of struggle.
Credit Bureau Reporting
The lender must report the deed in lieu of foreclosure to the credit bureaus. However, how it is reported is can be negotiable. You can request the lender report the deed in lieu as "paid as agreed." If the lender is unwilling to agree to a paid entry, ask for a neutral "unrated" or "settled." Although it seems unfair, the lender can report the deed in lieu as a "foreclosure" if they desire. A foreclosure will remain on your credit report for seven years.
Depending on your state foreclosure laws, your lender may be able to seek a deficiency judgment if the home is foreclosed and sold for less than the loan balance. A deed in lieu of foreclosure eliminates the risk of a judgment. If you intend to purchase a home again in the future through a lender, you typically will not have to wait as long as you would if the home was foreclosed. Homeowners who complete a deed in lieu usually can qualify for a mortgage again in approximately four to seven years.
Some lenders have "keys for cash" programs that offer homeowners relocation money in exchange for a swift and graceful exit. The federal Making Home Affordable Program features additional programs to help homeowners, including Home Affordable Foreclosure Alternatives program. If your lender participates in the program, you may be eligible to receive up to $3,000 to help with moving costs.
- Realty Trac: Deed in Lieu - A Way Out of Foreclosure
- KnowYourOptions.com: Deed-in-Lieu Option
- Trulia: Waiting Periods to Buy a Home After Foreclosure, Deed-in-Lieu, Short Sale and Bankruptcy
- MakingHomeAffordable.gov: Home Affordable Foreclosure Alternatives Program
- Bank of America Home Loans: Deed in Lieu
- Foreclosure Law Firms: When a Deed in Lieu of Foreclosure is a Good Idea
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.