Buy a House After a Deed-in-Lieu

A deed-in-lieu of foreclosure gives mortgage borrowers the option of walking away from their home and transferring the deed back to the mortgage lender. Deed-in-lieus involve an approval process, and lenders do deny some borrowers. But for borrowers who meet the lender's requirements, they can relinquish their mortgage rights and relieve their mortgage burden. Reasons for a deed-in-lieu might include losing a job and falling behind on mortgage payments. Lenders typically explore the option of a deed-in-lieu when there's an imminent risk of foreclosure.

But what if a borrower's financial situation greatly improves after a deed-in-lieu. Can he apply for a new mortgage loan?

Mortgage lenders don't report deed-in-lieus like a foreclosure, but this mortgage relief program can still have a damaging effect on credit. Yes, lenders approve and consent to taking ownership of the home. But this doesn't erase the fact that borrowers didn't fulfill their contractual agreement with the mortgage lender. Broken contracts justify negative credit reports update, and settling a mortgage debt can lower credit scores and stop loan applications.

Good news for borrowers who walk away from their mortgage, the consequences of a deed-in-lieu are not irreversible. As a matter of fact, Fannie Mae reduced the waiting period for a new mortgage after a deed-in-lieu from four years to two years. While this waiting period reduction opens the door to qualifying for a home loan sooner, borrowers must meet other loan requirements.

• 20 percent down payment
  
• Minimum credit score of 680
  
• Two years of consecutive employment
  
• Excellent payment record (no late or skipped payments)
  
• Reasonable housing ratio - mortgage payment cannot exceed 28 to 30 percent of gross monthly income
  

Steve McLinden, "Go Through Foreclosure or Walk Away," Bankrate.com
Marcie Geffner, "Three Ways to Get Rid of Your House," Bankrate.com
"Qualifying for a Mortgage," Home Loan Learning Center