Should a person find themselves in financial difficulty for whatever reason, whether it be through redundancy, illness or another factor and they cannot maintain their mortgage repayments, that person may consider a ‘deed I lieu of foreclosure’ should they be unable to either sell their property or work out a plan to resolve the situation.
If a deed in lieu of foreclosure is arranged, it negatively affects the borrower’s credit score by as little as 50 points to as much as 250 points depending on the credit bureau that it is reported to. This is a major deduction of a person’s credit rating similar to that of bankruptcy and will have short and long term consequences on the credit available in the future. When a deed in lieu of foreclosure is reflected on a credit report for seven years. The impact of the deed in lieu does diminish over time, however credit applications within the first two years especially could be difficult to come by and offer high interest if they are agreed. Once the deed in lieu is seven years old, the entry can be requested for removal by the client by notifying the relevant credit bureaus.
A new mortgage is an unlikely scenario for a person with the deed in lieu of foreclosure within the first two to three years of the entry being added to the person’s credit report. However the credit file can still be repaired by keeping existing or new credit products in good stead. For example by making payments on time and not meeting or exceeding credit limits. By doing this in the duration of the initial two or three years since the deed in lieu, the probability of obtaining a new mortgage at that time will be higher and more favourable interest rates and terms will likely be offered.
A deed in lieu of foreclosure could mean the single biggest significant drop on a person’s credit score. Even premier credit scores of 850 may reduce to a level of 600 should this happen and though a score of 600 would attract Subprime lending, due to the deed in lieu entry on the credit history, this could prevent lending altogether, even with an average credit score.