Two years ago, we put our house up for sale and moved to another area some distance away. Unfortunately, the house has not sold. We have an interest rate of 10.5% and owe almost as much today as when we purchased the home in 1989. We've kept current on the payments, but won't be able to for much longer. Defaulting on the mortgage is starting to sound like a good idea, if only to relieve our financial pressure. But if we let the house go, will we be able to buy items, like a car for instance, that requires a loan? This has left such a bad taste in our mouths that I don't even care about owning a house anymore; so qualifying for a mortgage isn't a priority. Should we let the loan go into foreclosure, or is there something else we can do?

You are certainly facing a difficult situation. A foreclosure is considered one of the most serious credit problems by many lenders, so it is likely that you would have difficulty obtaining new credit for at least the next few years if you default on your mortgage. Because a mortgage is almost always the single largest loan a person or couple ever has, it carries a great deal of weight in assessments of your credit. A foreclosure is therefore more detrimental to your credit rating than other delinquencies or even a repossession, which is in and of itself a serious credit problem. While some lenders might grant credit before the foreclosure cycled off your credit report in seven years, they would probably do so at higher interest rates than you could get with a clean credit history. Also, your credit card issuers or other creditors might review your credit file (they are legally entitled to do so) and change the terms of your agreements with them based on this new, negative change. This could include raising your interest rates or lowering your credit limits.

If you can find no other options for continuing to make payments until you can sell the house, you may be able to avoid foreclosure and its negative impact on your credit by arranging to give your lender full title to the property through a deed in lieu of foreclosure. If the lender agrees, this would relieve you of your obligation to repay the mortgage. (And they might be inclined to because working with you to obtain title to the property will be faster and less costly than the process of foreclosure.) Thus you could "get rid of" the house without damaging your credit history.

In sum, while not as serious as a bankruptcy, allowing a mortgage to go into foreclosure will significantly damage your credit. As with any other situation in which you have difficulty repaying a loan, it is best to work with the lender to arrange some kind of repayment (in this case, with the home itself) instead of simply defaulting.