One way to limit any further damage to your credit history and credit score is to sign a deed in lieu of foreclosure.

When you sign a deed in lieu of foreclosure you are transferring ownership in your property to your lender. It wipes out your mortgage loan — you’ll owe nothing. But, it also means you give up all the rights to and any equity you may have in your home.

If you don’t have any equity in your home, or you won’t after you sell the property and pay an agent and the costs of sale, using a deed in lieu of foreclosure to settle with your lender could be a good option.

A deed in lieu of foreclosure allows you to skip a lengthy and possibly expensive foreclosure process. It may keep your credit score from being further damaged, especially if your lender agrees to report your loan as “paid in full” or “paid as agreed.”

Your lender may have been reporting to credit bureaus that you missed payments but he or she will not report a deed in lieu of foreclosure. A foreclosure action will show up on your credit report, and lower your score.

You should be aware, however, that if you apply for another mortgage loan you will be asked to disclose if you have ever signed a deed in lieu of foreclosure. So, while it doesn’t show up on your credit score, your new lender will still want to know, and this may count against you when a lender weighs how risky you are as a borrower.

While a deed in lieu of foreclosure may be a good option for you, your lender may not be so eager to take back the property.

That’s because it forces the lender to possibly renovate and sell your house, according to “Foreclosure Investing for Dummies” by Ralph Roberts.

“A deed in lieu is done more for non-owner occupied properties,” says Dick Lepre, a San Francisco-based senior loan officer (www.loanmine.com). That is to say, it may be a good option if you have an investment property you can no longer afford to keep.

Signing a deed in lieu of foreclosure does not relieve you of any tax liability, says Lepre. Be sure to check with your tax preparer, accountant or enrolled agent prior to signing a deed in lieu to understand your tax obligations.

For more information, check out our other stories on foreclosure at ThinkGlink.com.

March 27, 2008.