A deed in lieu of foreclosure affects your credit score because the mortgage company reports it, usually as a foreclosure. Deed in lieu drops your credit score like a foreclosure drops your credit score.

Of course, there are things you can do. One is you can negotiate with your mortgage company when you are negotiating the deed in lieu. The negotiations are in two areas, how they report the deed in lieu to the credit reporting companies, and how any deficiency is handled.

The best reporting that your mortgage company can make is "PAID - SATISFACTORY" about your loan. Even a "PAID - SETTLEMENT" isn't too bad compared to foreclosure.

There is also a little known option called unrated, non rated or R0. It can actually help your credit and it is not a lie. The mortgage company can report you as R0 and you can do your deed in lieu. Make sure you get a written agreement that the mortgage company will not go after you for any of their financial losses. You can get a deed in lieu and buy another house if you do it this way.