A deed in lieu of foreclosure is often the last resort for homeowners who want to avoid foreclosure. Deeding your home to the lender because you can no longer afford the mortgage payment damages your creditworthiness. With time, you can reestablish good credit and recover from this financial misstep. You also can recover financially, as a deed-in-lieu likely forces you to move into more affordable housing.
Re-establish credit immediately after signing a deed-in-lieu. A deed-in-lieu diminishes credit scores as harshly as a foreclosure, according to My FICO. Maintain your other credit accounts by making payments on time. Payment history accounts for 35 percent of your credit score. Pay down balances that exceed 30 percent of an account's high limit, as credit utilization accounts for 30 percent of your credit score. Keep older accounts open and in use, and do not open several new accounts within a short period of time, as these activities also affect your credit score.
Accumulate funds for a down payment on your next home. You may qualify to buy another primary residence after two years with a 20 percent down payment through a Fannie Mae program. Other conventional loans, such as Freddie Mac mortgages, require a waiting period of at least four years with a minimum down payment of 10 percent. The Federal Housing Administration, which offers flexible qualifying guidelines, requires three years with a 3.5 percent down payment.
Apply for mortgage programs in accordance with your credit score and available down payment funds. You must explain to the lender why you can afford a new mortgage, what caused your deed-in-lieu and why another financial hardship is unlikely, in a letter. You must also demonstrate that your income and assets are sufficient to repay the new loan. Conventional lenders typically want to see that your new payment is less than 28 percent of your gross income and FHA lenders want it to be less than 31 percent, according to Bankrate.com.