6 strategies for dealing with an underwater mortgage (© Neil Beckerman/Getty Images)

© Neil Beckerman/Getty Images

Nearly 11 million homeowners are underwater — meaning they owe more on their mortgage than the property is worth — according to the most recent data from CoreLogic. For those homeowners, there are no easy answers. Should they keep paying and hope the market improves? Try for a loan modification? Cut their losses and walk away?

Gerri Detweiler, personal-finance expert for Credit.com, explains the pros and cons of several options.

1. Stay and pay. People feel attached to their homes, so Detweiler says their first impulse is often to stay put and keep sending in mortgage checks, even if it doesn't make financial sense in the long run. "Is it realistic for you for a while?" she asks. "Not just the next few months, but can you afford to stay and pay for the next several years? You may still be underwater at that point." Maintenance fees are another consideration. For instance, if you know you'll need a new roof or the heating system is on its way out, those repairs can add up. Of course, if the value of your home has declined, you may be able to get it reassessed and pay lower property taxes. (Bing: Lower your property taxes)

2. Refinance. A traditional refinance may not be an option for homeowners with negative equity. But those with loans owned by Fannie Mae or Freddie Mac who have not made late payments in the past six months and have no more than one late payment in the past 12 months may qualify for a refinance under the Home Affordable Refinance Program, which was recently extended through the end of 2013. If your loan hasn't been sold to Freddie or Fannie, Detweiler says you may be able to work directly with your lender on a refinance. Your credit score should not be affected if you refinance, although you could still lose your home if your situation changes and you can't afford the mortgage payments.

3. Loan modification. In a loan modification, the lender agrees to lower the interest rate and payments, either temporarily or permanently. If your mortgage payment is more than 31% of your monthly pretax income and you have suffered a financial hardship, you may qualify for a loan modification under the Home Affordable Modification Program. Some lenders have their own loan-modification programs as well. Trouble is, the process can be extremely time-intensive. And few loan modifications actually reduce the principal, so you're still in negative equity — you've just lowered your monthly payments. "Until you're at positive equity, you're stuck with that house," Detweiler says, pointing out that if there is a reduction in principal, you might have to pay taxes on that amount. Depending on how the modification is reported by the lender, it could also affect your credit score. She suggests consulting a credit agency approved by the Department of Housing and Urban Development to discuss your options.

4. Short sale. If your lender agrees to a short sale, you're allowed to sell your house for less than you owe on the mortgage. "One couple I interviewed got … $120,000 wiped out by their lenders," Detweiler says. "Depending on where you live and your financial circumstances, there are some amazingly good deals. But you could be one of the unlucky ones who has a lender who doesn't want to play ball." Before you close on a short sale, be sure to consult a tax professional, who can explain if you will owe any taxes on the forgiven debt, and a real-estate lawyer with experience in short sales to make sure the agreement relieves you of the deficiency.

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5. Foreclosure or walking away."Walking away from your mortgage is essentially the same as foreclosure," Detweiler says. "It's one of the most serious items on your credit report, in the same category with bankruptcy and repossessions." But the impact on your credit score shouldn't be the only consideration, Detweiler says. "Focus on 'How am I gonna come out of this financially?'" If you do decide to walk away, your biggest challenge could be getting the bank to take back the house. "The bank doesn't actually foreclose on that, so you're still legally responsible," Detweiler says. "The city may bill for trash pickup; you could be on the hook for insurance issues that arise." She suggests staying on the property as long as possible to make sure it's properly maintained leading up to the foreclosure.

6. Bankruptcy. Filing for bankruptcy won't erase mortgage debt. "What you're doing in a bankruptcy is you're trying to give yourself a reprieve," Detweiler says. Eliminating other debts could free up money to cover your mortgage, and a Chapter 13 bankruptcy could allow you to catch up on payments for five years without interest. But it doesn't allow you to stop paying the mortgage altogether. "In some areas of the country, you are able to wipe out a second loan that has become unsecured because the value of your property has dropped," Detweiler says. "Unfortunately, our current bankruptcy codes let borrowers negotiate any kind of debt but mortgages."

Whether you're planning to stay and pay or you're considering bankruptcy, Detweiler stresses that it's a good idea to consult an attorney early on. "Don't make that your last resort," she says. "Specifically, a bankruptcy attorney could help you decide if you can afford to stay in your home."