In my last article, I talked about how a foreclosure–the least desirable option other than bankruptcy for people who are upside down on their mortgage– affects your credit. Today, we’ll examine another option–deed in lieu of foreclosure.
Deed in Lieu of Foreclosure
In this scenario the borrower turns the house over to the lender and walks away without owing anything. A deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The main advantage to the borrower is that it immediately releases him or her from most or all of the personal debt associated with the defaulted loan. The borrower also avoids a foreclosure proceeding and may receive more generous terms than he or she would obtain in a formal foreclosure. Advantages to a lender include a reduction in the time and cost of repossessing the property.
In most instances, in order to be considered for a deed in lieu of foreclosure the total debt on the property should be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement offer must at least be equal to the fair market value of the property being turned over. Generally, the lender will not proceed with a deed in lieu of foreclosure if the outstanding debt on the property exceeds the current fair market value of the property.
Because the agreement must be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily. This will enact the parole evidence rule and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations.
Neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached.
How Does a Deed in Lieu Of Foreclosure Affect the Borrower’s Credit?
Most lenders report a deed in lieu of foreclosure as a foreclosure, so the credit scores will carry the same serious effect as if it were an actual foreclosure. However, borrowers can negotiate with the lender to report it differently in return for turning over the deed and avoiding foreclosure costs.
Many lenders will say that they cannot change the reporting status, but as you now know from part one of this series, they can because there is no law on the books that require lenders and creditors to report negative information to the three credit bureaus. Here are the credit reporting options in preferred order:
- Paid As Agreed-Credit scores will have already dropped over 100 points due to default in payments; however, if reported as Paid As Agreed, the borrower will be able to purchase another home in a shorter time period.
- Paid Settlement-Credit scores could drop 75-100 points in addition to the points already lost for delinquent payments.
- Foreclosure-Credit scores could drop 100-150 points in addition to the points already lost for delinquent payments.
How Long Before You Can Buy Another Home After Deed In Lieu Of Foreclosure
- 2 years from the date the Short Sale proceeding is completed on a 80%maximum LTV ratio
- 4 years from the date the Short Sale proceeding is completed on a 90%maximum LTV ratio
If there are extenuating circumstances that caused the borrower to have to enter into a Deed In Lieu Of Foreclosure, the waiting period is 2 years from the date the proceeding is completed on a 90% maximum LTV ratio loan.
In this case, as in any situation involving your credit, the key is always to be proactive!
So, if you go the route of a Deed in Lieu of Foreclosure, be proactive and work with your lender to get your status reported in the best possible light! I hope you’re having a great week — next time, we’ll look at what you need to know about Short Sales.
Recovering Your Credit After Deed In Lieu of Foreclosure
- My Free Special Report, Save Your Credit – Save Your Life is a great place to start! Click here to learn more.
- My Book, The Big Score – Getting It & Keeping It will give you the knowledge and the tools you need to Recover and Rebuild from any credit crisis. Even if you have great credit now, this book will help insure that it stays that way. Click here to learn more.
Bill Metzker says
I’m going to link this article to my blog. Question: On a mortgage application, there’s a box for the borrower to check if she/he has had a foreclosure in the last 10 years. Does the box have to be checked with a deed-in-lieu?
Is it true that Fannie Mae guidelines prevent lenders from accepting the deed in lieu of foreclosure unless the property has been listed as a short sale for three months?