How to Rebuild Credit After a Deed in Lieu of Foreclosure

By | June 10, 2010

Having to go through a deed in lieu of foreclosure can be a terrible experience. This process is only gone through after an individual has been unable to pay their mortgage and been unable to work out a plan with their lender. Luckily, this process is not nearly as bad as a traditional foreclosure would be to an individual’s credit report.

  • Most credit reports are lowered by approximately 250 points after the process is completed.

This action will remain on your credit report for seven years after it is posted. Paying all of your bills on time, not opening or closing many credit accounts and being extremely conservative with your credit will allow you to rebuild your credit after this problem has hit your credit report. Most lenders will not offer you a mortgage or any credit account for approximately one-three years after the process has completed. It may be necessary to wait longer if your credit score was on the lower end when you declared a deed in lieu.

However, there’s always a way to get credit or a loan when you have a job. But it is best to avoid these type of hard money lenders who will charge high interest rates and have a even tougher terms.

FHA insured home loans are typically not available to borrowers whose home was foreclosed on or given a deed-in-lieu of foreclosure within the past 3 years. However, if the foreclosure of the borrower’s primary residence was the result of extenuating circumstances, an exception may be granted if they have since established good credit. This does not include the inability to sell a home when transferring from one area to another.

  • A good way to rebuild your credit is to have a few open credit accounts. 

A vehicle loan and a couple credit cards with low balances that you pay every month should help you get your scores backup overtime. You do not want to have too many open accounts because this may hurt your scores. Please keep in mind that there is no fast or easy fix when it comes to building up your credit scores.  It takes time, patience and making your payments on time over a period of months to years for your scores to raise.

After two to three years an individual may be able to receive a mortgage and other big ticket items again if they choose. Many lenders will make strict requirements such as  more  of a down-payment up front and they may charge a higher interest rate. This is due to the additional risk that they are exposing themselves to after a borrower has declared a deed in lieu.

  • After all is said and done, it is imperative that you make all of your credit payments on time.

Do not miss a payment on any credit account or you may find it difficult to obtain a loan of any type. A deed in lieu may not be as major of a credit event as a total foreclosure but it is not like missing one month of your credit card payment. It is a major credit event that shows a large secured asset was unable to be paid for. Lenders want to be sure that they can trust their borrowers to make their mortgage payments on time each and every month.

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