How does a deed in lieu of foreclosure stay on your credit?

Question

We are military, and have been moved in a down market. We are unable to sell our home, and we have used all our savings to make the mortgage payments (on top of rent payments at new duty station). We are current right now, but we only have one more month in reserve to do this. We want to own another home some day after he retires, so I am trying to find out exactly how damaging a deed in lieu of foreclosure is, basically that is my only option right now. How long does it stay on your credit record? (We have a first and a second).

Answer 1

One of the last options that homeowners may consider to avoid foreclosure is simply giving their property back to the mortgage company. This is called giving the bank a deed in lieu of foreclosure, and is usually used when the foreclosure victims have been unable to find any alternate solution to save the home or sell it. Especially if the bank does not offer a realistic repayment plan, or the homeowners are unable to refinance out of foreclosure, and do not want to consider bankruptcy to stop foreclosure, a deed in lieu can help them get out from under the house and start moving on with their lives. Although this method of preventing foreclosure will have negative credit consequences, it also provides opportunities that the homeowners would not have, if they simply let the house go into foreclosure.

There is no doubt that the deed in lieu of foreclosure will be a negative mark on the homeowners' credit histories. In fact, it is just slightly better than having a full foreclosure show on their report, preventing them from obtaining a new home loan for some years, and drastically reducing their overall credit scores. However, the reason to go with a deed in lieu of foreclosure over a full foreclosure is that their credit may look much better, relatively speaking.

By accepting a deed in lieu of foreclosure, the bank agrees to take the property back instead of pursuing the foreclosure lawsuit and attempting to sell it at a county foreclosure auction. Once the bank accepts the deed, the foreclosure process is immediately ended, the foreclosure victims are no longer the owner of the house, and they can not be sued for a house they no longer own or have a mortgage on. There is also no way that the bank can go after any of their other assets, or try to sue for a deficiency judgment -- the deed is accepted as payment in full of the loan, and there is no loss on the property, so the lender can not sue for the difference of what it received and what it was owed. The deed counts as payment in full. (Of course, this is also one reason banks do not always accept the deed in lieu.)

Therefore, the deed in lieu can be used to stop foreclosure a lot quicker than casually waiting for the entire foreclosure process to wind its way through the county court system. This termination of the process can help the homeowners' credit quite a bit, depending on the circumstances. Especially because they can avoid some of the additional late mortgage payments that would have come if they had let the property go all the way through foreclosure, this can ultimately keep some negative information off of the credit report. In most foreclosure cases, the lender reports all of their payments late until the sheriff sale and then the foreclosure status is the final negative mark against their credit. But by giving the bank a deed in lieu, the foreclosure victims can stop this process months earlier and avoid a number of late payments.

Obviously, the deed in lieu will be reflected on their credit instead of the foreclosure, but the important thing is that they will show fewer late mortgage payments. The fewer payments missed before a solution was worked out, the more reliable and conscientious the homeowners will seem to other future creditors. Also, the quicker they can end the foreclosure process, the quicker they can begin recovering financially and credit-wise. If they can get a few months ahead of when the foreclosure would normally have ended by giving the deed in lieu, they will be that much better off, despite the fact of having the negative credit information.

Thus, the deed in lieu is not that much better than a foreclosure in absolute terms, but it can help homeowners by avoiding the maximum number of late mortgage payments and by giving them a chance to start the recovery process after foreclosure quite a bit sooner. Unless they have some other solution they are working on, if they have decided there is no way or reason to keep the home, a deed in lieu can be the most efficient way to stop foreclosure. If this is the best option, homeowners should try doing it as soon as possible to get the bank to accept right away, and have the foreclosure over with as soon as possible. While a deed in lieu is not the best solution in all cases, and will not result in homeowners saving their homes, and puts a negative mark on their credit report, it can be used by foreclosure victims to avoid the worst of the foreclosure, unload the house in a mutually-agreed way with the lender, and allow the homeowners to begin recovering financially sooner rather than later.

Hope that helps.

ForeclosureFish

Answer 2

That might not be your only option.

If you are not familiar with the Servicemembers Civil Relief Act, you might want to check it out before you do anything else.

Answer 3

Probably 7 years.