How Much Will Your Credit Score Drop after a Deed in Lieu?

A deed in lieu of foreclosure is a document wherein a borrower or mortgagor conveys to a lender or mortgagee the rights to a real property. This is done to satisfy a defaulted loan and prevent foreclosure proceedings.

There are many advantages in a deed in lieu of foreclosure, both to the benefit of the mortgagor and mortgagee. The main benefit the mortgagor or borrower gets is instant relief from all or most of the indebtedness he or she has due to the delinquent loan. The mortgagor also prevents him or herself from being associated with the negative effects of involvement in foreclosure proceedings. The mortgagor may also be able to take advantage of better terms, as opposed to a formal foreclosure process. The lender or mortgagee may gain in significant ways as well, as the effort, time, and cost of repossession will decrease. There are also more benefits if the borrower declares bankruptcy.

If a borrower is unable to pay for the mortgage, but cannot sell the property or restructure payment plans, he or she may choose a deed in lieu of foreclosure. Here, the mortgage company or lender is given the ability to put the property up for sale to salvage the balance of the loan.

Is credit score affected by deed in lieu of foreclosure?

A deed in lieu of foreclosure can make a negative impact on credit score. An individual may lose 250 or so points with this. The credit report will reflect the deed in lieu for seven years, although a borrower can still rebuild his or her credit. However, the ill effect on the credit score gradually lessens in time. An individual may request its removal from a credit report towards the closing of year seven.

When can I buy a home after a deed in lieu?

Lenders will not offer a loan to an individual associated with a deed in lieu a mortgage for a minimum of two to three years, since the deed in lieu significantly brings down your credit score. The chances of loan approval increase after a few years, especially if a borrower attempts to rebuild his or her credit score. After a few years, it is likely that an individual who has tried to increase his or her credit rating can purchase a home once more.