What to do if you’re underwater on your mortgage

The U.S. housing market has been struggling for years and it might not turn around for a while. Many experts say it could be 18 months before the market starts to improve.

With housing prices down to 2003 levels, that’s bad news for mortgage holders who are “underwater,” or owe more on their mortgages than their homes are worth. A recent study by research firm CoreLogic shows nearly one in every four U.S. mortgage holders was underwater in the second quarter of 2011.

Many homeowners who want to move don’t have the cash to make up the difference between what their houses will sell for and what they owe on their mortgages. If you’re in that position, you probably feel stuck.

But according to Phoenix, Arizona foreclosure defense attorney Joseph McDaniel , “there are many options, some of which are good for some people, and some of which are bad ideas for others.”

Here are some things you can do:

•Rent your home: If you decide to put your house up for rent, you might make enough each month to cover your mortgage. That would free you up to live somewhere else. Keep in mind there will be expenses involved with managing your property. Also, many homeowners’ associations regulate or prohibit renting homes out.

•Renegotiate your mortgage: Banks may do this for the customers on occasion, especially if you are going through some kind of financial difficulty. The non-profit Neighborhood Assistance Corporation of America is holding a nationwide tour of renegotiation events where customers meet with bank officials in hopes of lowering their mortgage rates.

•Walk away: In some states, if the bank forecloses on your home, it can’t come after you for what you owe on your mortgage. You’ll want to check with a lawyer to see if that’s the case where you live. A better option might be to negotiate a deed-in-lieu with the bank. With a deed-in-lieu, you convey your interest in the property to the bank and avoid the messy foreclosure process while the bank forgives your mortgage balance.

•Bankruptcy: This might be an option for you, especially if a lot of your assets are in retirement plans, which you would likely get to keep in a bankruptcy proceeding. If you file for bankruptcy, you should contact a lawyer. It is a complicated process involving many factors, some of which vary from state to state.

Also, don’t give up on the idea of selling your home, even if you are underwater.

“Sometimes the bank will simply settle for the sale price of the home and wipe out your debt. In other cases, the bank will take all or part of the difference and convert it into an unsecured loan,” said attorney Martin Sweet of legal website CLEVELANDLAW.TV .

The federal government has experimented with several different options to help underwater homeowners . A recent idea included a plan that would let you apply your monthly payments to principal rather than interest for five years.

Foreclosure defense attorneys advocate that individuals who may fall subject to foreclosure proceedings consult with an attorney, as many options vary state by state and a false step can severally damage your financial situation for a long time.

“One size does not fit all. There is a difference between being behind on payments and underwater. One should evaluate their goals and options with an experienced attorney and take everything they hear from their neighbors or read on the Internet with a grain of salt,” said St. Petersburg, Florida foreclosure defense attorney Marshall Reissman .

For more information about Foreclosure Defense Law and to watch videos of Foreclosure Defense Lawyers answering common questions on video, go to CLEVELANDLAW.TV .