Rather than go through foreclosure, some homeowners give the deed back to the bank. In return for surrendering the deed in lieu of foreclosure, the bank agrees not to sue you for any unpaid debts. If you get that in writing, you can give up the house and start over. Unfortunately, your credit's still going to suffer.
Foreclosure is bad for your credit. Unfortunately foreclosure alternatives -- selling the house or giving up the deed -- aren't any better. The Fair Isaac credit-scoring company says that on a credit history, they all say the same thing: You owed a big debt and you didn't pay it off as you agreed. Financially, it may be better for you to give up the house than keep trying to make the payments and undergo foreclosure. Credit-wise, you end up in the same place.
Impact of Deed-in-Lieu
There's no automatic rule for how much a deed-in-lieu hurts your credit. If you have an excellent credit score, a big black mark may hurt more than if your score is already mediocre. Poor credit scores don't have as far to fall. A credit score based on lots of accounts, all good, may drop less than someone with the same score and no credit accounts but the mortgage. Generally the blow to your score ranges from 85 to 160 points.
Some Good News
There are some advantages to giving up the deed in lieu of foreclosure. Some lenders would sooner see deed-in-lieu on your credit history, even though it's no better for your score. If you're having money problems, giving up the house fast may enable you to get your other bills under control faster. The faster you can get your finances back on track and start rebuilding your credit, the faster you can start improving your score.
If your choice is between deed-in-lieu and bankruptcy, bankruptcy is much worse for your credit. Giving up the mortgage is bad, but it only affects one credit account. Bankruptcy wipes out multiple accounts, and every one you don't pay off hurts your score. The impact is far more devastating. Of course, most people who file bankruptcy have bigger financial worries than just their credit. A deed-in-lieu only solves one financial issue.
A Durham, NC resident, Fraser has written about law, starting a business, balancing your budget and fighting evictions, among other legal and financial topics.