Deed in Lieu vs. Short Sale, Which is worse on credit once and for all?

I have been using the search feature for quite a while and am getting bogged down with half answers from people who don’t seem to know for sure.

  • First I read that a DILOF is not on your credit report because creditors don’t do a title search. Does that even make sense?

  • Then I read that it is on your report but it is not as bad as a short sale.

  • Then I read that it’s worse.

Does any expert have a clearly explained (if needed) definitive answer, without using “If I’m not mistaken”, “I think”, or any other unsure utterances, on how DILOF and SS affect credit and which is worse?

There is no such thing as an “expert” on credit scores. The way the score is generated is a tightly held secret.

So you aren’t going to get anything better than a guess. My guess is that deed in lieu is going to appear on your credit report, probably as a settlement, along with the amount the bank lost.

That will not be nearly as bad as a foreclosure where you caused the bank a whole lot of trouble and expense, and you not only reneged on your debt, but you refused to work with the lender on it.

I would expect a short sale to be just about equal to a deed in lieu as far as the effect on your credit report. Either way the bank has a loss, but you aren’t dragging them through a court procedure. They are bith a negotiated settlement.

In a normal course of events, anyone who is giving their house bank to the bank has already destroyed their credit, and even a hundred point difference in effect doesn’t make much difference when your score is already below 500.

Thanks for the straightening out. If that’s the case, I can’t understand what benefit a seller would get from my invasive short sale (w2s, paystubs, authorizations, etc.) as opposed to a “private” deed in lieu of foreclosure exit. I appreciate your help. :eek

Hi spleano,

You may already now this. If the homeowner has any other liens, judgements, etc. recorded in the county records where the property is located and many of them do at this point. The bank will probably not take a deed-in-lieu, because those judgements would still be attached to the property. They will need to foreclose to separtate those liens from the property. The debtor would still own the money for those other liens, now as unsecured debt.

That is where you as a skilled Short Sale (Debt Satisfaction) Negotiator can help them, by working to satify all debts with your purchase. You will actual have to anyway, to get the property free and clear.

I can see your question poses several other questions. With a short sale, you generally won’t be chased for any deficiency. With a DILOF, you face a very real probability you will be chased for the deficiency. Of course, your situation may dictate there isn’t a snowball’s chance in hades of being chased for that deficiency.

The difference between the two scenarios says that a DILOF would be worse for your credit score. However as one of the posters has already said, what difference does it make when the score is 500 or less after either action?

Just my 2¢.

Under some circumstances you can give your home back to the bank voluntarily. This is known as a deed in lieu of foreclosure. A deed in lieu of foreclosure is simply when you give the bank all of the ownership interest in the home and give up your ownership interest. This is usually done when a homeowner is behind on the mortgage and it releases the borrower from the mortgage debt.

As a borrower when you give your house back to the bank it will still report on your credit report as a foreclosure. This will make buying a new home harder in the future and it will stay on your credit report for seven years. A major benefit for a borrower to file a deed in lieu of foreclosure is that the borrower’s debt is released immediately and that a public judgment is prevented.

A deed in lieu of foreclosure is a benefit for a bank because they don’t have to go through all of the legal proceedings of a foreclosure and it helps to speed up the process of getting rid of the home for them. Also, the lender gets to decide if it is willing to accept the home back to put them in control of the situation. In the case of a home where more money is borrowed on the home than it is worth, a deed in lieu of foreclosure will probably not make sense to them and the lender will most likely not allow a borrower to give their house back to the bank.

A short sale may appear on your credit report as a "“pre-foreclosure in redemption status”, or as, "settled for less than owed’.

I am told that the FICO hit for either a foreclosure or for a deed in lieu is between 250 and 280 points, whereas, the short sale will only ding the FICO between 80 and 100 points – sort of the difference between being hit by a train or by a bus.

A borrower with a short sale on the credit report can buy another home in about 18 to 24 months and get interest rates that make sense. A borrower with a foreclosure or DIL may have to wait 36 to 48 months to get decent interest rates.