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Mortgage underwater? Here are options to keep from drowning

In today's troubled real estate waters, homeowners facing the rising tide of underwater mortgages have two choices: sink or swim. Consider that approximately 23 percent of those with a mortgage—some 11 million American homeowners—are "upside down" and owe more than their homes are worth, based on data recently published by CoreLogic.

While those numbers currently look grim, all is not hopeless, say the experts, noting that there are viable options borrowers can pursue to improve their situations, particularly if they need to sell their homes or can't keep up with the monthly mortgage.

If you owe more on your mortgage than your house is worth and especially if you cannot afford the payments, you have three choices, says Lex Levinrad of Distressed Real Estate Institute, Boca Raton, Fla.: modify the loan, pursue a short sale, or allow the home to slip into foreclosure.

"I would first recommend negotiating a loan modification with your lender, which you can easily do yourself without the help of an outside company," Levinrad says. "You will need to show proof that you can afford to continue making payments and stay in the home and will need to provide supporting documentation like paycheck stubs, tax returns and bank statements.

"If the homeowner can move into a similar rental property for substantially less money, then they have little motivation to keep paying their underwater mortgage," Levinrad adds. "Pursuing a loan modification makes the most sense for homeowners that like where they live and can afford the payment."If loan modification is unsuccessful or you don't want to keep your home, a short sale, in which the lender agrees to reduce the loan balance due to a financial hardship demonstrated by the borrower, is the next best step. While the drawbacks are that you'll be forced to move, your credit rating will be negatively affected and you may still be obligated to pay back some or all of the loan balance, it's quicker and less traumatic and damaging than a foreclosure, which can stay on your credit report for at least 10 years.

"If an underwater homeowner wants and/or needs to sell their home and they cannot afford to pay the deficit, the only option is a short sale. A typical loan modification, if approved, will only lower their payment," says Anthony Lamacchia, broker/owner, McGeough Lamacchia Realty Inc., Waltham, Mass., adding that the government's Home Affordable Foreclosure Alternatives program also is worth checking out (visit www.makinghomeaffordable.gov/hafa.html for more details).

Another strategy is to pursue a deed in lieu of foreclosure, says Mark Lee Levine, professor and director of the Burns School of Real Estate and Construction Management at the Daniels College of Business at the University of Denver. This allows you to deed your property to the lender, who in turn forgives you the entire amount of the mortgage; the lender can then sell off the home to recoup some or all of the losses.

If you can afford the monthly payments, like your property and plan on staying in your home for the foreseeable future, owing more on your mortgage than what your home is worth shouldn't be a worry, as most experts expect real estate values to eventually climb again in coming years as the market rebounds.

"As long as the borrower continues to make their payments, they will see the combined benefit of principal reductions through amortization and some recovery in the value of their property," says Greg Hebner, president of MOS Group, an Irvine, Calif.-based mortgage-resolution company. "It may still make sense to pursue some of the high loan-to-value refinancing options if there are better mortgage products available for the borrower's situation."

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