One way to limit any further damage to your credit history and credit score is to sign a deed in lieu of foreclosureForeclosure is the legal action taken to extinguish a home owner's right and interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds. in a property, so that the property can be sold in a foreclosure sale to satisfy a debt..
When you sign a deed in lieu of foreclosure you are transferring ownershipOwnership is the absolute right to use, enjoy, and dispose of property. You own it! in your property to your lenderA Lender is a person, company, corporation, or entity that lends money for the purchase of real estate.. It wipes out your mortgageA Mortgage is a document granting a lien on a home in exchange for financing granted by a lender. The mortgage is the means by which the lender secures the loan and has the ability to foreclose on the home. loanA Loan is an amount of money that is lent to a borrower, who agrees to repay it plus interest. — you’ll owe nothing. But, it also means you give up all the rights to and any equityYour share of ownership in a company. Stockholders are often referred to as equity investors, because they invest in the equity of a company. you may have in your home.
If you don’t have any equity in your home, or you won’t after you sell the property and pay an agentAn Agent is an individual who acts on behalf of a consumer. A real estate agent represents a buyer or a seller in the purchase or sale of a home. Licensed by the state, a real estate agent must work for a broker or a brokerage firm. An insurance agent helps a consumer purchase an insurance policy. Insurance agents are also licensed by the state. and the costs of sale, using a deed in lieu of foreclosure to settle with your lender could be a good option.
A deed in lieu of foreclosure allows you to skip a lengthy and possibly expensive foreclosure process. It may keep your credit score from being further damaged, especially if your lender agrees to report your loan as “paid in full” or “paid as agreed.”
Your lender may have been reporting to credit bureaus that you missed payments but he or she will not report a deed in lieu of foreclosure. A foreclosure action will show up on your credit report, and lower your score.
You should be aware, however, that if you apply for another mortgage loan you will be asked to disclose if you have ever signed a deed in lieu of foreclosure. So, while it doesn’t show up on your credit score, your new lender will still want to know, and this may count against you when a lender weighs how risky you are as a borrower.
While a deed in lieu of foreclosure may be a good option for you, your lender may not be so eager to take back the property.
That’s because it forces the lender to possibly renovate and sell your house, according to “Foreclosure Investing for Dummies” by Ralph Roberts.
“A deed in lieu is done more for non-owner occupied properties,” says Dick Lepre, a San Francisco-based senior loan officer (www.loanmine.com). That is to say, it may be a good option if you have an investment property you can no longer afford to keep.
Signing a deed in lieu of foreclosure does not relieve you of any tax liability, says Lepre. Be sure to check with your tax preparer, accountant or enrolled agent prior to signing a deed in lieu to understand your tax obligations.
For more information, check out our other stories on foreclosure at ThinkGlink.com.
March 27, 2008.