What to Do If Foreclosure is Killing Your Credit

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By Deanna Templeton

Foreclosures can do a number on your credit report, even for years after they happened. With the Great Recession causing an upheaval in the housing market and many homeowners behind on payments, the aftermath of foreclosures is still a reality for many Americans today. One reader wrote to Credt.com asking for help with a foreclosure on her credit report:

My home has been foreclosed but the second mortgage is still showing an outstanding balance on my credit report — should that be? How do I remove this? I expect “foreclose” status to remain for 7 years but not the amount. Am I right?

When a bank or mortgage lender forecloses on a mortgage, the loan will typically be reported as a “foreclosure” or “foreclosed” in your credit report. However, just because the mortgage has been foreclosed doesn’t necessarily mean the outstanding balance is automatically wiped out. Typically, credit reports with a foreclosed mortgage will show the entire outstanding balance, so the way the first mortgage is being reported is actually accurate and can’t be removed until it reaches the 7-year expiration timeline.

Foreclosure and Deficiency Balances

Foreclosure laws vary by state, but typically when a home goes into foreclosure the bank or mortgage lender will then attempt to sell the home to recover their losses. If the sale price of the home doesn’t cover the outstanding debt, the remaining amount may be considered a “deficiency.” Depending on your state laws, the lender may legally be able to attempt to collect on the deficiency amount or they may report the deficiency as “income” to the IRS if the debt is forgiven. This means you could end up receiving a 1099 (showing the forgiven deficiency as income) at the end of the year.

Foreclosure and Second Mortgages

A second mortgage is separate from the first mortgage, and even though the first mortgage was foreclosed, the second is not automatically included in the first mortgage’s foreclosure. This means the second mortgage will continue to be reported and the outstanding balance will remain. The second mortgage will not show “foreclosed” because it’s a separate loan and not part of the original/first mortgage, unfortunately. For more detailed information about foreclosures, second mortgages, deficiency balances and your rights, here are a few resources that will provide much more detail:

Underwater? Negotiating a Settlement On a Second Mortgage
Understanding Your Foreclosure Rights: A Consumer Law Review
1099-A In the Mail? How to Avoid Taxes on Cancelled Debt from Foreclosure or Short Sale
Foreclosure vs. Short Sale: What’s Worse for Your Credit?

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