This is a challenging situation that many are facing right now in America. Even families who ‘followed the rules’, putting 20-30% down on their home are falling into this if they did it at the wrong time (peak of the housing market).
Being underwater means their home will no longer sell for what the mortgage is valued at. I would follow with determining whether your financial situation has changed since you originally took out the mortgage. If not, the presumption is that you can still afford the payment, which is a good place to be. Then it simply becomes a waiting game, which doesn’t give you any flexibility since you can’t refinance or move, but at least you still have your home. Trying to get out of the mortgage puts you no better off than where you currently are.
The root of the issue is not really whether you are underwater or not, as unfortunate as that is. The root issue is whether you can no longer afford your mortgage payment. If this is the case, then you essentially have two choices, neither of which are very good: Short Sale or Foreclosure. I would recommend avoiding foreclosure at all costs. Foreclosures will cause your credit score to drop sharply, typcially about 200 to 300 points. They also stay on your credit report for seven years and can effect your ability to secure many types of credit (mortgage, car loan, credit cards). Short Sales have less of an impact on your credit but can be an administrative nightmare.