Homeowners who are underwater in their homes or have no other options to avoid foreclosure are often counseled to use a deed in lieu of foreclosure to give their property back to the bank. In the right situation, this solution can be quite appropriate and will allow the owners to avoid the worst consequences of having their house taken away from them. While there are numerous benefits to the deed in lieu, one of the most important is how it can positively affect the credit history of homeowners attempting to recover after their financial hardship.
There are two reasons, one direct and other indirect, that a deed in lieu of foreclosure is better on homeowners’ credit reports than seeing the house lost to a sheriff sale and having a full foreclosure reflected on their history. However, it should be noted that the deed in lieu is only one step better than the foreclosure, so it will not do much to improve the credit score. It’s main benefit will be to prevent the worst of the credit damage that foreclosure can cause.
The direct reason that giving a deed in lieu can have a positive effect on homeowner’ credit is that it shows the owners did something to save the home before the lawsuit had proceeded to the end and the property was sold at a public auction. The bank accepts the deed in lieu as payment in full of the defaulted mortgage, but they can only do this if the homeowners offer the deed in the first place. So even offering to give the property back to the bank shows that the owners took a proactive step in solving the problem, even if they were just admitting that they could not pay back the mortgage.
This shows other lenders that, although the homeowners fell into a hardship and defaulted on their housing loan, they recognized they could not keep the property and offered to give the collateral back to the bank without a fight or going through a lengthy, costly legal process. Obviously, this is only convenient to the mortgage company, but it indicates to other creditors that the owners are more likely to take responsibility when they fall behind on a loan.
The second reason that the deed in lieu is better for the credit report is that it can end the foreclosure process several months before it would be completed otherwise. When the bank accepts the house back, the mortgage is satisfied in full and the owners no longer have legal title to the house. This means that they are no longer responsible for paying the mortgage and have no other obligations that need to be satisfied. They can get a fresh start on repairing their financial situation without the burden of finding a solution to this particular problem.
How this helps the homeowners’ credit is that they will end the foreclosure process before experiencing a few more late mortgage payments. The fewer late payments they show on their credit report, the better it will look. Numerous missed payments leading up to a full foreclosure ended by a sheriff sale is obviously the worst possible scenario and will have the most damaging effects on a credit history. The deed in lieu ends this trend earlier by giving the house back to the bank before it is auctioned off, and so ends the string of late mortgage payments.
The deed in lieu is not the best option to stop foreclosure, and it does not do a whole lot actually to improve the homeowners’ credit. It’s main benefit is that it is a last-ditch effort when no other options are available, and it can help prevent some of the worst damage of the foreclosure appearing on the credit report. It is not a positive mark on a credit score, but it can prevent even more negative marks from being reported. However, if selling the property or a short sale can be done, these solutions can often present much better results for the long-term financial health of the homeowners than a deed in lieu of foreclosure.