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What Affects My Credit Score Worse a Deed in Lieu of Foreclosure Or a Short Sale?

If you are facing foreclosure you are probably aware that two of your last options are a deed in lieu of foreclosure or a short sale. Both options have their benefits and drawbacks. These are your last two options before an actual foreclosure, and unfortunately, you will lose your home with either option you go with; the goal with a short sale or a deed in lieu of foreclosure is to keep a foreclosure off your credit history.

A deed in lieu of foreclosure is an agreement where you deed your property over to your lender in exchange for being forgiven all the remaining mortgage balance. Your lender has to agree to do a deed in lieu of foreclosure, and they are only likely to do this if they feel they will end up better financially than if they do a short sale. If you and your lender decide to go with this deed in lieu of foreclosure option, you will sign several documents – the agreement in lieu of foreclosure and the deed. The agreement in lieu of foreclosure is the document that lays out the terms and conditions of the deed in lieu of foreclosure agreement, and will be signed by the lender as well as you. The deed is the document that transfers ownership of your property from you to the lender. Now the lender will mark your mortgage note as paid and will provide you with two documents -one that proves the debt is canceled, and the other which waives the lenders’ right to a deficiency judgment (the lender’s right to ask for the difference between what you owed on your mortgage and what they were able to sell your property for)

A deed in lieu of foreclosure affects your credit score only slightly less than a foreclosure. Doing a deed in lieu of foreclosure will still show on your credit report as a default on the loan and will drop your credit score by 200 points or more. A deed in lieu of foreclosure will stay on your credit report for seven years. After the 7 years you can ask for the deed in lieu of foreclosure to be removed from your credit report and you can begin rebuilding your credit score. Even if you are working on your credit score from day 1, it will be up to three years before you can buy another house. It may take even much longer than this before a lender will consider extending you a loan with any kind of sensible interest rate.

A short sale happens when a lender is willing to agree to accept less for the mortgage than they are owed because there is negative equity in a borrower’s home. Not all lenders are willing to do a short sale, and they are even less likely to do a short sale if your payments are current, although it is possible. It is a good idea to get a real estate lawyer to contact the loss mitigation department of your lender to find out if they accept a short sale and what your options are.

There have been cases where a short sale has been as damaging to credit scores as a foreclosure; a loss of 200-300 points, while there have been other cases where a short sale has only dropped credit scores by 100 points. Since every situation with a short sale is different – how many days behind the borrower is in their loan, how much negative equity they owe and their credit score to begin with – it is impossible to determine how a short sale will affect your credit before you start talking to a professional.

However, one benefit of a short sale that may appeal to you is that you can obtain a new mortgage with a sensible interest rate faster than with a deed in lieu of foreclosure. After only two years after a short sale your lender may be willing to offer you a sensible interest rate loan.

It is difficult to judge what option will affect your credit worse, but each option has other benefits and drawbacks. If you are looking to buy a new home as soon as possible and you are willing to put up with selling your home you may want to consider a short sale. If you just want the hassle of your foreclosure to be over, and you are willing to, potentially, take a bigger hit on your credit score, and you can convince your lender to go through with a deed in lieu of foreclosure, that may be your best option.

Since every situation is different, it is impossible to determine whether a deed in lieu of foreclosure or a short sale will affect your credit score worse. It may be that a deed in lieu of foreclosure is your best option and will affect your credit score the least, while it may also be true that a short sale will affect your credit the least. Your best options are to get in touch with a foreclosure professional as soon as possible and figure out what is your best option if you are out of other options. Each day you let pass by, your credit score is being more damaged, you are losing more money, and you are getting further away from the day your foreclosure is behind you and you are on fresh financial feet.

Gordon Sands, Real Estate Investor

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