Deed In Lieu Of Foreclosure Will Hurt Credit Rating

Added February 24, 2007 by Ilyce R. Glink

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Summary: What are your options when you can no longer afford your mortgage and you haven't been able to sell your home? You may think you're facing foreclosure and a deed in lieu of foreclosure may be an option. Either a foreclosure or deed in lieu of foreclosure will hurt your credit rating or credit score. Another option, instead of a deed in lieu of foreclosure, may be a short sale.

Q: In a previous column, you advised that doing a deed in lieu of foreclosure is a last resort if you are certain that you'll be going into foreclosure.

Here's my situation: I'm current with my mortgage payments, but I'm at the end financially and basically at my wit's end. I have tried to sell the property for over two years. I've consulted with an auctioneer but he doesn't think we'll be able to sell the property. I can't rent the unit because it's an owner-occupied building and they won't give me a waiver of the rules. And, now I've moved elsewhere because of my job.

I'm running out of money and will soon have to start missing payments. Can I sell this property or give it to the bank before they start to take action? Is there a way to do deed in lieu of foreclosure without hurting my credit?

A: Unfortunately, there is no way to do a deed in lieu of foreclosure without hurting your credit, unless you get the mortgage company to report your mortgage account as paid in full.

Please talk to your financial institution about what is involved, and if you're a candidate for a deed in lieu of foreclosure (you may not be if you are current on your mortgage payments). You may also wish to consult with a real estate attorney who can help you sort through your options and make the most of the situation.

But bear in mind that you may hear from your real estate attorney or lender that your only option might be to sell the property for whatever price you can get -- even if you sell it at a loss, and then get the lender to accept a "short sale" -- a sale where the sale proceeds aren't enough to cover the amount owed to the lender and the lender accepts the payment anyway.

You may face income tax issues resulting from the lender forgiving part of the debt (which the IRS will likely treat as income to you, even though you don't receive any cash in the transaction), but you might be able to get yourself out of the hole and start over again sooner rather than later.

Feb. 24, 2007.

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