Mortgages are considered to have gone underwater when the debt owed on the loan is more than your house is worth. This is a complicated financial situation often arising from refinancing done on your mortgage, and it can take time to build back equity and bring the mortgage above water. But if you carry an underwater mortgage into divorce proceedings, you may be pressed into taking action on the dividing the mortgage debt, and this can be complicated.
You generally have three options when facing an underwater mortgage during a divorce. Refinancing may be possible if one party is willing to take on the mortgage and pay the other spouse for his or her share of the house, but even then lenders are reluctant to finance underwater mortgages. But this is more attractive to a lender than a short sale, which has the home sold quickly at a greatly reduced cost to cover your debts to the lender. Even if a short sale goes through, though, it usually doesn't cover the entire debt, and your credit rating takes a hit as a result. Lenders only approve short sales in extreme situations.
A third option is allowing the home to go into foreclosure, which devastates your credit rating but may be the only viable option, depending on your finances and the debt accrued.
Of course, Pittsburgh property division attorneys also point out that couples can continue to own the home together after their divorce and make payments on it until the amount owed is less than the home's value, but both parties must be willing to work together in order for this to happen.
Source: NASDAQ "Underwater Mortgages and Divorce" Nov. 11, 2011