What are my options if my house is upside down, and I can’t afford the payments?

 
The housing crash has effected housing values all over the country.  The US government has implemented Making Home Affordable programs to assist up to 9 million homeowners to get loan modifications and refinances, which would greatly reduce their payments and prevent foreclosure.  Without these government programs in place, banks would not refinance nor modify the loans because these loans would fall out of compliance with their lending guidelines.
There are three potential options:
Loan modification
Refinance
Short sell your home
 
Most homeowners will try for option 1 and 2 before they resort to option 3 – selling their home.  All of the above options provide financial relief to homeowners which reduces their housing expenses.
 
If a lender is unwilling to lower payments, selling a home on a short sale can be a good option, provided the homeowner qualifies.  Homeowners must be able to demonstrate financial hardship due to loss of income or lack of liquidity. 
 
If a homeowner cannot demonstrate financial hardship, meaning they have adequate income and assets and appear to have the ability to pay the mortgage debt, a lender may label the homeowner as a strategic defaulter and may pursue them legally after repossessing the home in a foreclosure sale.