In 2002, when I was making about $525 a week as a graphic designer, I purchased a home with a $66,000 mortgage. To make a long story short, I'm now part time, unable to make my mortgage payments unless I take money out of my 401K (bad idea), and my current credit score is 570 because my emergency fund is gone. I've been putting purchases on my credit cards, and I can't find a second job because I live in a very depressed area. My question is: which of the following courses of action would screw my credit up the least? a. stop paying on my credit cards so I can afford my mortgage b. Stop paying my mortgage so I can pay my credit cards (resulting in foreclosure on a house I can't afford to keep anyway) I've talked to my lender a few times but they aren't interested in modifying my loan because I have too much debt. It seems they'd rather take the house in foreclosure than accept lower monthly payments. I've also talked to debt modification companies but they want more money than I make in a month to pay my cards down quicker. Any ideas? I'm also considering selling the house in a short sale, but was told that also screws up my credit.
To answer your question directly, generally speaking, defaulting on your mortgage tends to be more severe of a negative impact on your credit compared to defaulting on your credit cards. Typically, it is advisable that if you had to pick and choose which one to pay, the preference should be the mortgage. However, if you can't can't afford to pay the mortgage, even if you have stopped paying the credit cards, then doing a loan modification is would be the next logical step. Unfortunately, you have tried that route with no success. I recommend taking a look at the Making Homes Affordable web site to see if there are any other alternative ways to modifying your home mortgage.
If you still run into the problem that the lender will not modify your mortgage because of the amount of unsecured debt you have. I recommend that you take a look at the different debt consolidation options to see if that will help you qualify. Normally when you consolidate your debt you tend to lower your overall monthly payments. This may put you in a better position to qualify for a modification. Please also review all of your debt relief options.
If you still are unable to qualify for a modification you may want to consider doing a short sale. To learn more about the differences between a short sale, deed in lieu, and foreclosure please read an article I wrote A Deed In Lieu Of Foreclosure vs. A Short Sale.
Ultimately, there is no simple solution to this situation, and if you find that none of these routes work out for you, I encourage you to speak with a licensed bankruptcy attorney in your state.
I hope this information helps you Find, Learn. Save.