If you’re behind in your mortgage payments and facing a foreclosure, you might be thinking about different options, like giving up your home with a deed in lieu of foreclosure or filing for bankruptcy in order to, among other things, buy some extra time to live in the property. With either one of these options, your credit score will drop. But is there a difference when it comes to how much your credit score will fall? Will one impact your score more than the other? Read on to find out.
A credit score is a number that a credit scoring company assigns to you that, supposedly, predicts whether you’ll default on your payment obligations. Credit scoring companies use different factors and calculations to come up with your score, but for the most part they use information from your credit report.
Many credit scoring companies exist, but the two main companies are FICO and VantageScore, which produce scores ranging from 300 to 850 (higher is better). FICO scores, though, are used in 90% of all mortgage loan applications, according to FICO.
Factors influencing your FICO score include your payment history, your outstanding debt, the length of your credit history, how much new credit you’ve recently applied for, and the types of credit you have. (Learn more about credit scores and how they’re calculated.)
A deed in lieu of foreclosure, commonly called a “deed in lieu,” is a transaction in which the bank agrees to accept a deed to the property instead of foreclosing.
The impact that a deed in lieu has on your score depends primarily on your credit history. If you had a high credit score to begin with, a deed in lieu will cause a bigger fall in your score than if you started out with a low score. So, if you’re one of the few borrowers who hasn’t missed many payments—or any payments—before doing a deed in lieu, you’ll likely see your score drop 100 points or more. On the other hand, if you’ve missed a bunch of payments before completing a deed in lieu and had a correspondingly low credit score, your score won’t fall as much. According to FICO, if you start with a score of around 780, a deed in lieu (without a deficiency balance) shaves 105 to 125 points off your score; but if you start with a score of 680, you’ll lose 50 to 70 points.
After a deed in lieu, it will likely take several years for your score to recover—longer if your score started out high. Though, the time it takes to rebuild credit is largely affected by your payment history and outstanding debt going forward. So, if you stay current on your bills and your available credit increases, your score will likely rebound more quickly than if you continue to make some late payments and stay overextended.
A bankruptcy is worse for your credit than a deed in lieu. Again, if you had a high credit score to begin with, your score will plunge more than if you started out with a low score. According to FICO, if you start out with a credit score of 780 and file for bankruptcy, you’ll lose 220 to 240 points. If you have a score of 680, you’ll lose 130 to 150 points.
Even though a bankruptcy will hurt your credit score more than a deed in lieu, filing for bankruptcy might still be a good option for you, particularly if you have other debts you can reduce or eliminate through the process. If you’re eligible, you can discharge certain debts with a Chapter 7 bankruptcy, as well as delay a foreclosure—maybe by a few months—giving you some extra time to live in the home.
Bankruptcy can also be a good option if you want to catch up on your missed mortgage payments and keep your home. If this sounds appealing, you might consider filing a Chapter 13 bankruptcy. (For more information, see Should I File for Chapter 7 or Chapter 13 If I Want to Keep My Home?)
If you need help balancing the pros and cons of filing bankruptcy versus completing a deed in lieu of foreclosure, consider talking to a bankruptcy attorney or a foreclosure attorney. If you need general information about how a deed in lieu of foreclosure works, or about other alternatives to foreclosure (like a loan modification or short sale), consider talking to a HUD-approved housing counselor.
(To find out how other alternatives to foreclosure affect your credit score, as well as how a foreclosure itself hurts your score, see Which Is Worse for Your FICO Score: Bankruptcy, Foreclosure, Short Sale, or Loan Modification?)