Seeking advice on minimizing credit impact of deed in lieu

[Anonymous]

Hi Forum Members,

My wife and I are currently negotiating a deed in lieu with our lender for a house we can no longer afford (I know, common problem).  Our lender told us that once the process is completed, the deed in lieu will be reported as status code 89:

89	Deed received in lieu of foreclosure on a defaulted mortgage.

I'm wondering if anyone on this board has experience negotiating for a different code / status to be reported to the credit bureaus.  If we can successfully get concessions, will status code 13 or 61 have less of damaging impact on our credit scores?

13 Paid or closed account/zero balance
61 Account paid in full was a voluntary surrender.

If anyone has any experience in handling this situation and have tips or advice to share on how to successfully negotiate with lenders, your help will be greatly appreciated!  Thank you and God bless.

- Mike

[RobertEG]

My understanding is that a deed in lieu of forclosure is a settlement agreement between the mortgager (borrower) and the mortgagee (lendor) in which the parties avoid forclosure  proceedings of a loan under default.  The mortgager is released from future indebedtedness by a settlement agreement in which the mortagee conveys the property to the mortgager. It is not a true discharge of prior debt.

Just as with other aspects of FICO scoring, two separate things are added to a consumer’s credit file.   First is the prior payment history on the debt prior to its payment or settlement.  Credit reporting and FICO scoring are both set up to retain negative prior payment history, and payment or settlement of a debt does not, in and of itself, delete any prior delinquencies derogs that preceded discharge future of the debt.  The other aspect of credit reporting is that status codes are provided, for at terms of discharge of debt, to record how it was discharged.

Along those lines, account status code 89 records the discharge of future indebetness by way of a settlement in which the mortgagee reports “deed received in lieu of forclosure of a defaulted mortgage.”  That correctly records the facts of the situation. They didnt say the debt was paid, only that they wont forclose on the property.

A status code of 13 reports “paid or closed account, zero balance, no longer in use.”  That does not seem to accurately reflect, in my opinion, the facts.  The debt was not paid to zero balance.  While the legal balance that the mortagor can now collect on the unpaid debt my now be, through the settlement agreement, zero, settlements are not reported to credit files as paid in full. In my opinion, status code 89 is more appropriate and accurate that status code 13.

A status code 61 indicates “account paid in full, voluntary surrender.”  I see a settlement obligation only not to forclosue on the property, and thus hold you to future indebetness.  Again, the credit reporting status codes provide code 89 for your specific situation, and I think other status codes are not appropriate.

You have avoided a lenthy forclosure proceeding, with the reporting of a status code 94, forclosure, which would have had a much greater negative impact on your credit score.