Credit effect of deed-in-lieu uncertain

10/11/2008 12:00 AM

10/09/2008 7:40 PM

Q. I have a real estate investment property that is a single-family home in a country club community. I bought it about two years ago at a below-market price and have done some significant rehab. I finally got it rented, but the rent doesn't cover the mortgage. The house has been on the market for more than four months without any offers. I'm considering doing a deed-in-lieu of foreclosure to the bank, but I'm trying to minimize or eliminate any effect on my credit score, which is about a 750. What else can I do to get rid of the property?

No one can answer your question specifically. A piece of negative information affects each person's credit history differently because of all the other pieces of information in it.

There isn't a set 100-point or 150-point drop for a bankruptcy or deed-in-lieu of foreclosure. You don't necessarily get hit with a 50-point drop every time you're late paying a bill. Some of these negatives are cumulative, meaning that the point drops get steeper every time you do it, and some of them are based on length. For example, you'd get a sharper drop if you're 90 days late on a payment than if you're 60 days late.

Also, how the negative information is actually coded by the lender when the information is updated to your credit history is crucial.

You usually don't have a deed-in-lieu situation without other negative events reported on your credit history. For example, some lenders won't consider a deed-in-lieu unless you have failed to make your mortgage payments for several months. By not paying your mortgage for several months, your credit history will take a severe hit. Add to that a deed-in-lieu situation, and your credit history will be severely hurt by the time you walk away from the property.

But if you can no longer afford the property, you can't sell it, and the bank has agreed to take it back, that's all you can do. You should make sure that the bank reports the deed-in-lieu as “paid in full” so that your credit score doesn't suffer further.

As for selling your property, unfortunately, some real estate markets are in the worst housing market since the Depression. Banks are now selling repossessed houses for less than half of what they were “worth” three years ago. Other than dropping your price further, stepping up your marketing efforts (including online video and photos), and making sure that everyone who sees the property knows what a great deal they are getting based on local comps, there is little you can do other than wait it out.

One positive note is that you have the property rented. While it certainly depends on where your property is located, how much rent you get and what other expenses you have, at least you have a tenant who is looking after the property, and the rent can pay some of the property expenses.

If you do find a buyer for the home and the buyer offers you less than what you owe on the mortgage, you may ask your lender to accept the money from the buyer to pay off the mortgage in full. This would be considered a short sale and could adversely affect your credit history, but it should not be as bad a hit as failing to make your mortgage payments and then giving the property to the lender via a deed-in-lieu of foreclosure.

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