Our series about six options if you are underwater on your home has drawn a lot of comments. Some readers are wondering whether they should stay and pay or try to get out. Here’s a reader question we received this week:

I have been thinking a lot about whether to keep my home. I really feel like the place is a money hole. I paid $455,000 for my townhouse and the place across the street is selling for $150,000. I still owe $190,000.

I can afford to pay for the place but I feel like I could lose more money in the future. I tried to rent it out but found no promising tenants.

I really don’t know if I should keep it or not. I have a very long one and a half hour commute, and now I have a young child too. I am thinking about just renting a small place near work and starting over. Which of your six options are good for my situation? Please help! — Stuck in California

Dear Stuck,

I can only imagine how stressful this situation is for you, but I think you need more information before you can make a decision. You don’t need to go into “analysis paralysis” but you do need to investigate three things in more detail:

Find out exactly what kind of places are available to rent closer to work in your price range. Don’t just look online—go and look at some places and talk to the landlords so you can get a good idea what they require in terms of first and last, security etc. Get a good feel of whether you could rent an acceptable place for what you are paying now. (And of course check out schools since that will be an important factor with a young child.) If you are in a position to buy in another year or two, consider also looking at homes to rent with an option to buy.

If you discover that you’d have to pay a lot more to live closer to work, or if you can’t find something acceptable in a decent school district, you may decide that it’s better to stay put. Or maybe you’ll discover that for a little more you can get a decent place and save an hour a day in commuting time. You won’t know until you hit the pavement and check out what’s available.

Find out if you will be on the hook for a remaining balance. If it you have a non-recourse loan, the property is the only collateral for the loan and you can likely walk away without worrying that you will be sued for a deficiency. Many purchase money mortgages in California are structured that way. If you are not sure, make an appointment to talk with a real estate attorney who can review your paperwork with you.

Find out what your tax liability may be. Meet with a tax professional (an enrolled agent or CPA) with experience in handling 1099-C and 1099-A issues to learn whether you would owe taxes on the forgiven balance if you do a short sale or walk away. You may be eligible for the Mortgage Forgiveness Debt Relief Act or the other exceptions or exclusions I outlined in my previous article on this topic. This is an important question because you don’t want to be surprised with a large tax bill.

Read: 1099-C In the Mail? How to Avoid Taxes on Cancelled Debt

Since you bought your home for $455,000 and owe $190,000, it sounds like you’ve lost quite a bit of money that you put into it. That has to be a very tough pill to swallow. It also sounds like you are worried the value can go down further. It’s impossible to predict, though, how much further home values will drop or how long they will take to stabilize and then start going up again in your area. That means there is no single right or wrong answer here. Gather some more information and make the best decision you can knowing that at least you’ve made an informed choice to stay or leave.

Do you have a question for Credit.com’s Credit Experts? Submit it to creditexperts@Credit.com. We can’t respond to every question but we’ll choose the most relevant and educational ones to answer on the blog.

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Foreclosures and Bankruptcy – Protecting Your Home

Losing a home to foreclosure can be a stressful occurrence. Purchasing a home normally means a long term commitment to a mortgage and financing for the purchase of the home. When a person is no longer able to afford the payments on the property for whatever reason the result usually is a bank foreclosure on the property.

Persons who are having difficulties in making mortgage payments normally ask what should I do in a home foreclosure? If it seems inevitable that the payments cannot be brought up to date and refinancing is not an option the home owner should consider a bankruptcy proceeding. Although bankruptcy laws have been tightened in recent years to give added protection to financial institutions the remedy is still available to persons having difficulty in meeting financial obligations. In many instances a primary home is protected through the bankruptcy. When a home owner is able to shed other debt there may be enough income to support the mortgage payments. Past due amounts can be rolled back into the mortgage and the foreclosure actions will cease.

Only a qualified bankruptcy attorney can evaluate the situation and determine if proceeding in that manner will be beneficial to the home owner facing foreclosure. If you are asking what should I do in a home foreclosure? you may want to contact an attorney to discuss the options.

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California is one of the hardest hit areas for home foreclosure. The biggest reason for this is the growing rate of unemployment and the fact that the state is almost bankrupt. With jobs slipping away more and more people are losing their houses. It is happening all over the country but California is one of the hardest hit states.

Those who live in California will be happy to know that there are systems now in place to help families to keep their houses. There is a Hardest Hit Fund to help home owners to keep their houses when financial hardship hits. It is available to residents of California and some of the surrounding states. It is hard for many families to afford their houses and there are public programs to help solve the problem.

California has a very high unemployment level and that is causing a large number of people to lose their houses. Home foreclosure is a scary problem all over the country. There are a lot of programs for people who are in a bad situation to help them keep their houses. It is a growing problem to which there are solutions that the public as a whole needs to find.

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Angry & confused is what happens when new home dream disappears…for now! photo credit: tikibata

Maurice Roberts and his wife found their dream home.

They have 20% to put down.

They have W-2 verifiable income.

They also have good credit.

Should be a slum-dunk, right?

That’s what Maurice and his wife thought until their mortgage professional called them with some strange news.

Oh wait, it’s the government we’re talking about here.

Why didn’t you say so. Anything “shocking” is to be expected when the government’s involved.

DO NOT DISPUTE YOUR CREDIT REPORTS….

Maurice followed the book on buying a home.

He first pulled his own credit reports and discovered damaging credit information that was NOT his.

So he did what I expected him to do. He informed the bureaus reporting this INACCURATE information (in writing).

Maurice didn’t have to do any of this. He was golden with his ultra-impressive 800 middle score and a large down payment.

Maurice could NOT be more golden.

Oops, there’s a problem. Fannie Mae has a policy that requires lenders to hand-underwrite any loans where’s there’s any type of credit dispute. Maurice informed the bureaus in writing of inaccurate account information on his reports. Minor stuff. Obviously didn’t affect his 800.

Still, it’s Fannie Mae policy and you don’t screw with government policy as idiotic as it is.

Apparently, this policy is needed to control/prevent/minimize scammers from using the credit dispute law to hide bad credit.

Of course, this policy is extremely unfair to good people like Maurice and his wife who are simply doing what they should do and that is to challenge inaccurate information.

What will happen to Maurice’s new home? That will depend on how quickly the bureaus can pull the “in dispute” off Maurice’s credit file. In this case, Maurice would benefit from ANY response, even a verified as accurate response.

He clearly has the credit. Anything above 760 is golden. In the meantime, I will not hold my breath waiting for Fannie Mae to review a STUPID, harmful policy. I don’t recommend you hold your breath either.

Credit fix report absurdities often leave me shaking my head. What do you do? You might as well go outside and scream at the top of your lungs and pray the seller extends closing, keeping Maurice under contract. You might be quick to blame Maurice’s mortgage person for not spotting this red flag. In all my years in real estate (and I have a mortgage broker’s license), I have NEVER heard of such a policy. Have you heard of this policy before? Please scroll down and tell me about a similar experience you’ve had or share in Maurice’s and his wife’s anger/despair. Misery loves company.

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No homeowner plans to go into foreclosure. However, the current economy has put many people in the uncomfortable position of missed mortgage payments, and the housing market has made it difficult to sell a property for what is owed against it. If you find yourself in this position, what can you do to stop home foreclosure dead in its tracks?

First, contact your lender. Home foreclosure costs money, and many lenders will work with you to help bring your loan current. Some may agree to modify the terms of your loan. It is more cost effective for the lender to get the loan current than to proceed to foreclosure. This option is time sensitive: depending on the lender and mortgage insurer (FHA, VA, or private insurer), foreclosure proceedings are initiated after the loan becomes 60 to 90 days past due.

Second, if efforts to work with the lender are unsuccessful and home foreclosure seems imminent, you can stop foreclosure dead in its tracks by filing for a bankruptcy before the lender files a notice of default. A bankruptcy filing causes an automatic stay of foreclosure activity. The amount of time will vary with the type of bankruptcy filed, and it may not eliminate the possibility of foreclosure, but it will buy time, and that time might be enough to bring the loan current.

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   Your credit score has many uses. It sets the rate on a car purchase, home purchase, insurance rates and getting a credit card. Thus, when you plan to buy a home, make sure to get a copy of your credit score first and correct false entries on it. If you have a lower credit score or you want your score to increase, it is of vital importance that you fix it before buying a home. Below are steps on how to repair your credit before home buying.

1. Ask for a copy of your credit report from the three credit bureaus. Make an assessment of your report and ensure that you have a clear mind when you address problems like erroneous data.
2. Begin paying for your monthly dues on time if you are usually late in paying them. Make extra effort to meet deadlines, which helps greatly in improving your score, especially if you start making payments promptly.
3. When you check out your report, examine the different loans you failed to pay. Start paying every item one by one and create a list of priority. Although you do not have to pay everything on your card, you surely have to pay a considerable portion of your loans. Prioritize outstanding debts and those with high interests and deal with them immediately.
4. Overwhelming debts can greatly upset you, particularly if you want a home mortgage. However, you can always seek professional help by hiring a financial adviser or a credit counsellor. While this could cost you, investing on someone who has professional knowledge and experience is worth it.
5. Report false entries and mistakes on your report right away, which could include late payments or over charges. Make it a point to follow up your request and have the credit bureaus delete these items immediately.
6. Refrain from opening and applying for new credit cards. As much as possible, try to make all your purchases in cash for the things that you need instead of using your credit card.

Bear in mind that repairing your credit score is not something that can be done overnight. It requires a great deal of determination, effort and perseverance. If you start to get discouraged within any stage in the repair process, then you could not expect your credit to disappear like magic. Patience is required in entire process, thus make sure to do everything you can to reap the rewards of repairing bad scores and replace them with good ones. Make sure to spend time doing the necessary steps and secure all the important requirements and documents before engaging in the process. It could help to wait for a while before buying a home until your score is repaired and you see a considerable increase to be able to enjoy lower interest rates in your loan. Bear in mind that improving your credit score is more beneficial to your home buying plans; you will get to enjoy lower interest rates and choose the right home for you.

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