Tuesday, May 14, 2013

How Long Does a Foreclosure Stay on Your Credit Report?

Okay, so today I learned that some very intelligent people (loan officers and mortgage brokers, mainly) are completely clueless as to how long a foreclosure stays on your credit report. They're talking about decade-long reporting periods and I'm just sighing and facepalming like Picard. This is akin to a doctor lauding the health benefits of the Atkins diet.

You can't talk sense into some people. You just can't.

So here's the skinny on how long a foreclosure stays on your credit report: 7 years. There are three reasons that well-educated people, for some ungodly reason, seem to want to believe that foreclosures stay on your credit report for ten years or more:

1.) They're making assumptions based on general public record reporting periods
2.) They found themselves in a pinch and need numbers, any numbers, stat!
3.) They drink. A lot.

The Public Records Hangup

The deal with public records is this: the majority of public records hang around and haunt your credit report for a decade or longer. Got a civil judgment? Unless you live in one of the few states with an enforcement period of less than 7 years (in which case the reporting period for the judgment is 7 years) you're looking at a good 10 years or more of that judgment sticking around and damaging your credit. The same can also be said for bankruptcy. A Chapter 7 bankruptcy carries a 10-year reporting period. A Chapter 13 bankruptcy  however, adheres to the same 7-year reporting period that most other negative items do.

Foreclosures, because they have such a detrimental impact on your credit scores, often get lumped into the 10-year category. For example, how often have you heard someone say something along the lines of: "That will hurt your credit as much as a bankruptcy or foreclosure!" or, "Foreclosure and bankruptcy are the worst things for your credit!" See?

The truth of the matter, is that although foreclosures are public records, federal law limits them to a reporting period of no more than 7 years. So it doesn't matter what state you're in, or what type of foreclosure it was or what your loan officer/mortgage broker/real estate agent says. Foreclosures get deleted after 7 years. Period.

Foreclosure Damage for More Than 7 Years

Just because the foreclosure itself doesn't stay on your credit report for more than 7 years, that doesn't mean that damage related to the mortgage is limited to 7 years. Before your lender forecloses, you've got to default on your mortgage. And that, my friends, will skin your credit down to the bone. The mortgage default is a different entry than the foreclosure and that too hangs around for 7 years.

So, if you default on your mortgage and your lender takes 2 years to foreclose, you can count on 9 years of credit damage. Two from the default, five that the default and the foreclosure share, and two more from the foreclosure after the default gets deleted.

Do You Have to Admit to Foreclosure?

Here's where mortgage lenders get tricksy. (yes, I meant to say "tricksy"). They know that, after 7 years, that foreclosure gets deleted from your credit report and, short of digging through some old public records, there is no way for them to find out about it. So they include a question about past foreclosures on your mortgage application. Oh yeah. Don't be surprised if you dance to the bank after a foreclosure falls off your credit record only to discover that your lender wants you to fess up to it anyway.

It's considered fraud to lie on a mortgage application. But if the federal government thinks you need to be let off the hook after 7 years, shouldn't your mortgage lender do the same? My advice: download or request a mortgage application from several lenders and just don't bother filling out the ones that ask about your previous foreclosure. You can rest assured that, given your "history" they aren't going to offer you a lower rate than a lender who has no clue that, once upon a time, you lost a home.

Related Articles: 

How to Get a Real Free Credit Report Without a Credit Card

Credit Reporting Period vs. Statute of Limitations

What Happens to a Second Mortgage Before and After Foreclosure?

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