The Effect of a Deed in Lieu on Credit

Foreclosure

Mortgage loans become delinquent after a payment has not been made for 30 days. The lender can file a foreclosure proceeding on delinquent loans they service. Generally, most lenders begin this process after a 90-day delinquency. Foreclosure proceedings are lengthy and costly to the bank and are usually avoided, if possible. Homeowners, or borrowers, facing foreclosure are faced with a few options after entering the delinquency period of a loan. If these do not work, the bank will legally obtain ownership of the property.

Options

The borrowers can begin to mend the loan status by reaching an agreement with the bank. A loan modification program may be available to those homeowner's experiencing extreme financial hardship due to unforeseen circumstances. Another option is to pay the amount owed, plus penalties and interest to the lender. The third option is to sell the property at a short sale. Potential buyers can place a bid on the property for generally less than the fair market value of the home. If the lender agrees to it, then they receive the profit from the sale. Another option to avoid foreclosure is using a deed in lieu. By using this method, the borrowers willingly deed the property back to the bank. Generally, banks would like the homeowners to put the property on the market for a few months in an attempt to sell, so that they receive cash, rather than a property.

Impact on Credit

According to CNN Money, the biggest impact on a homeowner's credit score is the first delinquency. A missed payment can cause the credit score to drop 40 to 110 points, dependent on other factors. The credit score will continue to drop with each missed payment. Eventually, a deed in lieu of foreclosure could result in the loss of 85 to 160 credit points. A foreclosure filing typically sees the same general range of loss. This option is viewed by creditors as a serious delinquency on the credit history.

Considerations

Deeds in lieu and foreclosures can remain on the credit report for 7 years. At this time, a request must be made to the credit bureau to remove the foreclosure from a credit report. A bankruptcy, however, will remain on the credit report for much longer. Chapter 13 bankruptcy involves a 7-year repayment plan plus 7 years to be removed from the credit report. Chapter 7 bankruptcy remains on the credit report for 10 years. Although a serious delinquency on a mortgage loan impacts credit seriously, a deed in lieu may be a better option than bankruptcy.