If you are behind on your mortgage and your creditor is soon discussing the words “deed in lieu of foreclosures,” then you are most likely seeking solutions which will influence your credit rating as minor as possible. This is a relevant, and major one, as the difference between these two routes could mean your credit score recovers in only a couple years, or has to go almost a decade before being up to full power again.
The brief response: unless you are nearing default, marketing your house for cash almost usually safeguards your credit much better than a deed in lieu of foreclosure. However, the complete answer is subject to timing, how far behind you already are, and what your lender will report. This guide outlines what you can expect to see happen on your credit under each path, explains what a deed in lieu actually is and then really why so many homeowners decide not to go through with that.
Deed in Lieu of Foreclosure: What Is It?
You sign a deed in lieu of foreclosure transferring the ownership of your home back to your mortgage lender, and they agree to cancel out your mortgage debt. You just sign the deed over to them, avoiding a formal foreclosure proceeding, auction and court process on the part of the lender.
This sounds like a cleaner option on paper. You skip the public auction, you skip months of litigation, and in many cases the lender will forgive your remaining debt if the sale price on your house is less than what you owe. However, “less damaging than a full foreclosure” isn’t the same thing as “no damage at all,” and that difference is critical when it comes to safeguarding your credit.
The Impact of a Deed in Lieu on Your Credit Score
Here comes the part many homeowners do not anticipate: a deed in lieu of foreclosure is reported as a derogatory, just like an actual foreclosure to the credit bureaus and depending on your credit history prior to the actual deed in lieu can hit you just as hard.
Based on Nolo’s legal encyclopedia, foreclosures, short sales and deeds in lieu of foreclosure all have approximately the same effect on your credit score, and the amount you drop is mainly determined by how solid your credit was beforehand. A person whose score has benefited going into the deed in lieu, who, for instance, had not yet missed many payments, could lose 100 points or more because of it. It will be smaller if you had already been scoring in a low range due to missing several payments before the deed in lieu, since there is less room to fall.
It seems to set up the awkward and very frustrating nature of relationships. These homeowners who acted the earliest, employable with the best credit scores when they took an L in lieu, are sometimes losing the most points. Don’t lose points, the longer you wait to take action. The deed in lieu is not what hurt your score it was being late on payments every month like clock work before the Negotiator even approached them about a deed in lieu.
In addition to the loss of points itself, a deed in lieu is reported as a negative tradeline with all three major credit bureaus and remains on your credit report for up to seven years from the date of your first missed payment (not from the final settlement date). According to Experian, a deed in lieu will usually drag down your credit scores as long as it’s on your report and can make mortgage lenders reluctant to do business with you again for several years after.
What Happens to Your Credit When You Sell Your House for Cash
And that is where it becomes a million times easier to compare. So if you sold your house and paid off the mortgage balance completely at closing, leaving no deficiency behind, there is nothing derogatory to report. Your mortgage account closes with a “paid in full” or “paid as agreed”, same as any other home sale.
The effect on credit is totally due to what happened prior to the sale, and not as a result of the sale. Those late payments may already be on your credit report (if you had missed one or two mortgage payments before the sale) and will stay there for seven years no matter how you eventually handle the loan. But the sale does not represent a new slur. No foreclosure entry, no deed in lieu entry and no “settled for less than owed” notation here because they paid their lender the amount they were contractually obligated to pay the lender.
This is why a cash for keys sale, particularly when expedited, generally does much more to preserve credit than a deed in lieu. You are NOT asking the lender to take less than what they are owed OR for the loan to be reinstated. Still, you are repaying in full the debts, which is the best possible situation that a lender can report.
For those who are unsure how their mortgage balance is addressed in a cash sale, our discussion of what happens to your mortgage when you sell your home for cash walks through the steps involved with paying off that debt at closing.
Deed in Lieu vs. Cash Sale: Side by Side
| Factor | Deed in Lieu of Foreclosure | Selling for Cash Before Default |
| Reported to credit bureaus | Yes, as a derogatory tradeline | I understand that your mortgage close is recorded as fully paid. |
| Typical score impact | Depending on starting score: 160+ points -/+ 85 points More layers to how to do this. | Minimal to none from the sale itself |
| How long it remains on your report | Also note that missed payments stay on your credit file for: Up to 7 years from first missed paid | You have late payments that existed before, but a new entry is not added. |
| Effect on future mortgage eligibility | Most lenders want you to wait multiple years | Does not create a waiting period created by the sale |
| Deficiency balance risk | The lender may or may not be forgiving for the excess amount | No, mortgage is paid off in full at closing |
| Speed | Lender negotiation can take weeks to months. Usually have a team of lawyers on your side | If you are a cash buyer can close in 14 days or less |
The Tax Side that Most People Overlook: Cancelled Debt
There is a dimension of this comparison that never gets mentioned until it surprises you with an unanticipated tax bill the following spring. The IRS can consider the amount that the lender forgives (the remainder of what you owed in excess of your home value) as taxable income to you, and send you a Form 1099-C for cancellation of debt.
Topic No. 431, Canceled Debt provides general rules about cancellation of debt income, including exceptions that might apply to your situation, on the IRS website. Whether or not an exclusion applies to your individual situation is why this is a conversation you want to have with a tax professional, before agreeing to any deed in lieu arrangement, not after.
If you sell your house for cash and the selling price pays off your mortgage in full, there is no cancelled debt and nothing to report on a 1099-C associated with the mortgage. And this is one more reason a clean sale tends to be a simpler result, for your credit and taxes.
When You Select Your Options, Timing Matters a Lot More
Perhaps the largest misconception that homeowners have is that there is some sort of decision point between a deed in lieu and a cash sale that is what ‘decides’ where your credit will go. To be honest, timing is just as much of a factor.
If you remain current in your mortgage, or only in arrears by one payment, and sell quickly enough, much to nothing may show on your credit file. The longer you wait to pay, the more damage is done by your missed payment alone (not even considering how you choose to resolve this later).
The same reason that a pre-foreclosure sale tends to do wonders for your credit more than just sitting around waiting for the auction block. We go into this more in our guide for selling your house during foreclosure, but the same principle applies here: each month you put off making a decision is another month of compounded damage no matter which exit strategy you ultimately choose.
Most of the time, you will have other potential avenues to consider first, and that is where a deed in lieu might make sense.
In fairness, a deed in lieu, is not always the wrong path. In some cases, it can be the only real alternative:
- A deed in lieu may enable you to walk away (with or without a deficiency judgment, depending on the lender and state law) if your home has negative equity, meaning that you owe far more than the home is worth, and you’re unable to bring money to closing to make up for the difference.
- Once you have incurred a number of late payments and your credit has already absorbed much of its damage due to these same late payments, the marginal effect on top of that from a deed in lieu may be less than it would be for someone with no lates at all.
- Some homeowners do negotiate soft terms as part of a settlement but your lender will report the account favorably only if they are willing to; none of these reports is guaranteed, you will have to work with your loan servicer yourself.
However, in every one of these cases, it is advisable to talk to a HUD-approved housing counselor before you sign anything. The U.S. Department of Housing and Urban Development is found to offer a list of approved housing counseling agencies that can provide free or fee-based assistance with foreclosure alternatives such as deeds in lieu, short sales, and loan modifications.
Staying Away from the Deed in Lieu Conversation by Selling to Eagle Cash Buyers
When we talk to most of the homeowners considering a deed in lieu, it’s often only because they believe they are out of time or options. For the most part, a cash sale is also still an option even if the foreclosure date approaches much faster than people imagine, and it solves the underlying issue in exactly the same manner that a deed in lieu does: by being afraid to pay down the mortgage so lenders have no other claim.
There is a gap, which is what ends up being reported. When Eagle Cash Buyers buys your house, the title company that does the closing will pay off your mortgage balance, just like in any other home sale. If your sale net is sufficient to cover what you owe, your mortgage closes as paid in full: not a deed in lieu, not a foreclosure, and not settled for less.
Since we pay cash for homes as-is with no repairs, showings, or Realtor commissions involved the process is quick enough to matter once a foreclosure date pops up. As such, someone like ourselves can often have a closing date of 14 days from acceptance, which affords you significant time to do something before deed in lieu / foreclosure is the only option left to you. Did you ever reach a point on this situation that foreclosure date has been scheduled? If so, then in the future read our guide outlining options to stop foreclosure depending on how long you have left.
Each offer we send is without any obligation and you are never obliged to continue. Learn how the process works from the first call through closing day, or read what other homeowners in a similar situation have said about their experience in our homeowner reviews.
Frequently Asked Questions
Do but their credit is a deed in lieu of foreclosure better for not only would be under several dozen at least time?
Generally, yes, but only modestly. The majority of sources view foreclosures, short sales and deeds in lieu as equally detrimental for your credit score. A deed in lieu may spare some of the collateral damage that can stick to your credit over a drawn out foreclosure process, but it is still a derog event and will ding you as much as 100 points or more depending on your starting score.
All TitlesDeed in Lieu of Foreclosure: What You Should KnowHow long does a deed in lieu stay on my credit report?
Up to 7 years, based on the date your mortgage payment was missed by you and caused the deed in lieu, not as of when the deed in lieu was signed off. That seven year window also applies to a foreclosure that has been paid off.
Will it count against my credit if I take cash bid on selling my house and pay off my mortgage?
No. When a mortgage is paid through a sale, it is reported as “paid in full” or “paid as agreed,” which means that the entry is neutral or positive. Credit damage: If you were late in paying on your accounts before the sale, that record will remain on your report for its normal reporting period, but a sale itself does not carry an additional derogatory mark.
What if I am behind with payments can I still sell my home for cash?
Yes. You can sell even when you are in arrears. However, that loan can be paid off at closing just like any other sale proceeds in the amount needed to pay off your mortgage balance (including past due amounts and unpaid fees or interest). If you do not know if your unique situation qualifies, a no-obligation cash offer costs you nothing and clarifies where you stand.
What if I owe more than my home is worth?
They are sometimes referred to as being underwater, which alters the calculation. In this case you will have to do a short sale, deed in lieu or bring money to the closing table on top of all that plus whatever is unpaid on mortgage. A licensed real estate agent, or HUD-approved housing counselor can help you determine which option works for your particular numbers.
Question 1: Does Selling For Cash Impact My Credit Score?
No. One important fact to remember is that the sale of your home by itself does not get reported to credit bureaus. How the existing mortgage account is closed out determines what happens to your credit. A sale that pays off the loan in full is an account closure without any further residue of derogatory.
The Bottom Line
If you are comparing a deed in lieu of foreclosure with selling your house for cash, the numbers in terms of credit almost always favor the sale, especially if you sell before you get too far behind. A deed in lieu still counts as a derogatory event and will remain on your credit report for seven years, while a cash sale that pay off your mortgage, with no new accounts to report.
In either case, timing is everything. The earlier you try things, the more of them are still an option, and the lower the collateral damage along the way. If you are having a deed in lieu conversation with your lender and want to know whether there is still time for a swift, clean exit, contact the pros at Eagle Cash Buyers (214) 308-1910. We will let you know whether a sale makes sense, and if it does we can act fast enough to make this change.
