Negative Equity What To Do

Negative equity—owing more on your mortgage than your home is worth—is one of the most stressful financial situations homeowners face. You feel trapped. You can't sell without bringing cash to closing. You can't refinance. And if the market keeps declining, the hole gets deeper.

As of early 2026, approximately 2.3% of U.S. homeowners are underwater, down from 12-15% during the 2009-2012 housing crisis but up from the 1.8% low point in 2022. If you're one of them, this guide shows exactly what to do.

Understanding Negative Equity

Negative equity (also called being "underwater" or "upside down") occurs when:

Current [Home Value](/blog/appraisal-process-explained) < Total Mortgage Debt

Example:

• Home worth: $285,000
• First mortgage: $310,000
• Equity: -$25,000 (you're $25,000 underwater)

This typically happens when:

1. You bought at a market peak with a small down payment
2. Home values declined after purchase
3. You took cash-out refinances that exceeded appreciation
4. You rolled closing costs into your mortgage when buying
5. You're in a market experiencing significant correction

How Did This Happen? Common Scenarios

Scenario 1: The 2021-2022 Buyer

Bought in mid-2022 at peak pricing:

• Purchase price: $475,000
• Down payment: 3.5% (FHA loan) = $16,625
• Mortgage: $458,375 at 6.5%

2023-2024 market correction in your city: -12%

• Current value: $418,000
• Current mortgage balance: $452,000 (after two years of payments)
• Negative equity: -$34,000

Scenario 2: The Cash-Out Refinancer

2018: Bought for $320,000, mortgage $288,000 2020: Home worth $365,000, did cash-out refi to $340,000 (took $52,000 cash) 2021: Home worth $395,000, did another cash-out refi to $370,000 (took $30,000 more) 2024: Market corrects 15%, home now worth $336,000

• Current mortgage: $363,000 (after payments)
• Negative equity: -$27,000

Scenario 3: The Job Relocation

Bought 18 months ago in a cooling market:

• Purchase: $390,000 with 5% down
• Mortgage: $370,500
• Unexpected job transfer to another state
• Home now worth: $355,000 (8% decline)
• Current mortgage: $366,000
• Negative equity: -$11,000
• Can't sell without bringing $11,000+ cash to closing

Immediate Actions: What to Do Right Now

If you just discovered you're underwater, here's your action plan:

Step 1: Confirm Your Actual Position

Don't rely on Zillow or Redfin alone. Get accurate numbers:

For home value:

• Get 2-3 real estate agent CMAs (free)
• Check recent sales of truly comparable homes (not just "similar")
• Consider a formal appraisal ($400-600)

For mortgage balance:

• Log into servicer account for exact payoff amount
• Include ALL liens (second mortgages, HELOCs, tax liens)
• Note any prepayment penalties

Many homeowners think they're more underwater than they actually are because they use conservative value estimates.

Step 2: Assess Your Options Based on Your Situation

Your best path depends on three questions:

1. Can you afford the current payment?

• YES → You have more options (strategic patience, prepayment, refi programs)
• NO → Consider loan modification, forbearance, or short sale

2. Do you need to move soon?

• NO → Time is your ally (equity rebuilds through payments + appreciation)
• YES → You'll need to bring cash, do a short sale, or rent it out

3. How underwater are you?

• Less than 10%: Relatively easy to recover in 2-3 years
• 10-20%: Challenging but recoverable in 3-5 years
• 20%+: Requires aggressive strategy or long timeline

Step 3: Stop Making It Worse

Don't:

• Take another HELOC or cash-out refi (impossible anyway when underwater)
• Default on payments unless you've explored all other options
• Make expensive improvements hoping to increase value enough to flip
• Panic-sell and bring a huge cash amount to closing without exploring [alternatives](/blog/heloc-alternatives)

Do:

• Keep making regular payments (protects your credit)
• Build emergency savings (3-6 months expenses)
• Research your options thoroughly before acting
• Consult a HUD-approved housing counselor (free)

Strategy #1: Stay Put and Wait It Out (Strategic Patience)

Best for: People who can afford payments and don't need to move

How it works: Continue making regular payments while the market recovers. Your equity improves from two directions:

1. Each payment reduces principal
2. Market appreciation (eventually) increases home value

Real example:

• Current: $25,000 underwater
• Monthly principal paydown: ~$400-600
• Annual principal reduction: $5,000-7,000
• If market appreciates 3% annually on a $300,000 home: $9,000/year

Timeline to positive equity:

• Year 1: -$25,000 + $6,000 (payments) + $9,000 (appreciation) = -$10,000
• Year 2: -$10,000 + $6,500 + $9,300 = +$5,800 (back to positive!)

Pros:

• No damage to credit
• No out-of-pocket costs
• Market usually recovers over 3-5 years
• You maintain housing stability

Cons:

• You're stuck for years
• Can't access equity for emergencies
• Stressful to owe more than value
• Job relocation becomes complicated

Success factors:

• Stable employment
• Can afford payments comfortably
• No urgent need to relocate
• Belief that local market will recover

Strategy #2: Make Extra Principal Payments

Best for: People with extra cash flow who want to accelerate recovery

How it works: Pay down the principal faster than the [amortization schedule](/blog/amortization-schedule-guide) requires. Every extra dollar goes to principal, never to interest.

Real example:

• $30,000 underwater
• Standard payment schedule: $6,000/year toward principal
• Add $500/month extra: $6,000 additional per year
• Total annual principal reduction: $12,000

Timeline improvement:

• Without extra payments: 3-4 years to positive equity (with 3% appreciation)
• With extra $500/month: 2 years to positive equity

Implementation:

1. Set up automatic extra payment through servicer portal
2. Specify "apply to principal only"
3. Even $100-200/month makes a difference
4. Use windfalls (tax refunds, bonuses) for lump-sum principal payments

Pros:

• Fastest path to positive equity that you control
• Saves massive interest over loan life
• Improves financial position even if market doesn't recover quickly

Cons:

• Requires available cash flow
• Money is locked in [home equity](/blog/equity-vs-appreciation) (illiquid)
• Opportunity cost (could invest elsewhere)

Strategy #3: Loan Modification

Best for: People struggling to afford payments

How it works: Your lender agrees to change loan terms to make payments more affordable:

• Reduce interest rate
• Extend loan term (30 years → 40 years)
• Temporarily reduce or suspend payments
• In rare cases, reduce principal balance

Real example:

• Current: $360,000 mortgage at 7.5%, payment $2,517
• Modified to: $360,000 at 4.5%, 40-year term, payment $1,823
• Monthly savings: $694

How to request:

1. Contact your servicer's loss mitigation department
2. Explain hardship (job loss, medical emergency, etc.)
3. Submit financial documentation
4. Complete modification application
5. May need to be 30+ days late to qualify (check with servicer first)

Government programs still available:

• Flex Modification (Fannie/Freddie loans): Extends term, reduces rate
• FHA Home Affordable Modification Program (HAMP): For FHA loans
• VA loan modifications: Special options for veterans

Pros:

• Avoid foreclosure
• Lower monthly payment
• Stay in the home
• Some programs include principal forbearance

Cons:

• Dings your credit (typically 60-100 points)
• You're still underwater
• Not all modification requests are approved
• Extended loan term means more total interest

Success rate: About 40-50% of modification applications are approved as of 2026.

Strategy #4: Refinance Through Special Programs

Best for: Underwater homeowners with Fannie/Freddie or FHA loans who are current on payments

Even when underwater, some programs allow refinancing:

High LTV Refinance Option (Fannie Mae)

• Available if your current loan is owned by Fannie Mae
• Can refinance up to 97% LTV (3% equity required)
• Must be current on payments (no 30-day lates in past 6 months)
• Must benefit from lower rate or switching ARM to fixed

Example:

• Home value: $300,000
• Current mortgage: $285,000 (95% LTV)
• Current rate: 7.25%
• Refinance to: 6.5% through High LTV program
• New payment: $200/month lower

FHA Streamline Refinance

• For existing FHA loans
• No appraisal required (your underwater status doesn't matter!)
• Must reduce payment or switch ARM to fixed
• Minimal documentation

Example:

• Current FHA loan: $310,000 at 6.5%
• Home value: $295,000 (underwater by $15,000)
• Streamline refi to: $310,000 at 5.75%
• Monthly savings: $185
• No appraisal means your negative equity isn't an issue

VA Interest Rate Reduction Refinance Loan (IRRRL)

• For veterans with existing VA loans
• No appraisal required
• Can refinance up to 100%+ LTV
• Must lower interest rate

Pros:

• Lower monthly payments
• No appraisal means negative equity doesn't block refinance
• Improve financial position while waiting for equity recovery

Cons:

• Must have qualifying loan type (Fannie/Freddie/FHA/VA)
• Closing costs (though can be rolled into loan)
• Interest rate must be significantly better to qualify
• You're still underwater after refinancing

Strategy #5: Rent It Out

Best for: People who need to relocate but don't want to sell at a loss

How it works: Keep the property, move to your new location, and rent out the home. Rental income covers most or all of the mortgage while you wait for equity to recover.

Real example:

• Mortgage payment: $2,400/month (including insurance, taxes)
• Rental income: $2,200/month
• Out-of-pocket cost: $200/month

After 5 years:

• Principal paydown: $35,000
• Market appreciation (3%/year): $45,000
• Total equity improvement: $80,000
• If you were $25,000 underwater, you're now +$55,000

Requirements:

• Verify your mortgage allows rentals (most do, but inform your lender)
• Property must be rentable at market rates
• You can afford the difference if rent < mortgage
• You can manage being a landlord (or hire property manager for 8-10% of rent)

Pros:

• Keeps the asset
• Rental income covers most/all carrying costs
• Equity builds while you wait for market recovery
• Potential tax benefits (depreciation, expense deductions)

Cons:

• Landlord responsibilities
• Property damage risk
• Vacancy periods (no rent, but mortgage continues)
• May violate mortgage terms if not handled properly
• Harder to qualify for new mortgage at your new location (lenders count partial rental income)

Implementation checklist:

1. Research comparable rental rates
2. Calculate all costs (mortgage, insurance, HOA, maintenance reserve, [property management](/blog/property-management-complete-guide))
3. Consult tax professional about conversion to rental
4. Inform your insurance company (need landlord policy)
5. Screen tenants thoroughly
6. Set aside 3-6 months reserve for vacancies/repairs

Strategy #6: Short Sale

Best for: People who must sell and cannot bring cash to closing

How it works: Sell the home for less than the mortgage balance, and the lender agrees to accept the sale proceeds as full payment (forgiving the difference).

Real example:

• Mortgage owed: $330,000
• Home sells for: $295,000
• Lender forgives: $35,000
• You walk away owing $0

Process:

1. List home with experienced short-sale agent
2. Find a buyer
3. Submit short sale package to lender (financial hardship letter, bank statements, tax returns)
4. Lender reviews and approves/denies (takes 60-120 days typically)
5. If approved, close sale
6. Lender issues 1099-C for forgiven debt (may have tax implications)

Pros:

• Escape the underwater property
• Avoid foreclosure
• Less credit damage than foreclosure (typically 100-150 point drop vs. 200-300 for foreclosure)
• Lender usually can't pursue deficiency (varies by state)

Cons:

• Severe credit damage (takes 3-7 years to fully recover)
• Tax bill on forgiven debt (though Mortgage Forgiveness Debt Relief Act may apply)
• Foreclosure may start if short sale falls through
• Not all lenders approve short sales
• Process takes 3-6 months minimum

Tax warning: The $35,000 forgiven in the example above is considered "cancellation of debt income" and you may owe taxes on it UNLESS you qualify for an exclusion (insolvency or Mortgage Forgiveness Debt Relief Act provisions).

Strategy #7: Deed-in-Lieu of Foreclosure

Best for: People who can't afford payments and can't complete a short sale

How it works: You voluntarily transfer the property title to the lender in exchange for being released from the mortgage.

Process:

1. Contact lender's loss mitigation department
2. Submit deed-in-lieu application
3. Lender evaluates property value and your situation
4. If approved, you sign over the deed
5. Lender releases you from mortgage debt
6. You move out on agreed timeline

Pros:

• Avoid lengthy foreclosure process
• Less damaging to credit than foreclosure (slightly)
• Lender may offer relocation assistance ($1,000-5,000)
• Deficiency judgment usually waived

Cons:

• Lose the home
• Major credit damage (similar to short sale)
• Must vacate property
• Potential tax liability on forgiven debt
• Lenders prefer this option rarely (they'd rather foreclose or approve short sale)

Strategy #8: Strategic Default and Foreclosure (Last Resort)

Best for: Literally no one, but sometimes it's the only option

What it means: Stop paying the mortgage, let the home go to foreclosure, and walk away.

I'll be blunt: This should be your absolute last resort after exhausting every other option. The consequences are severe:

• Credit score drops 200-300+ points
• Foreclosure stays on credit report for 7 years
• Can't get another mortgage for 3-7 years (depending on loan type)
• May face deficiency judgment (lender sues you for the difference)
• Emotional and mental health toll
• In some states, lender can garnish wages

When it might be unavoidable:

• Can't afford payments even after modification
• Too underwater to ever recover (50%+ negative equity)
• No rental market for the property
• Health emergency or complete financial collapse
• Tried loan modification, short sale, deed-in-lieu—all denied

If you go this route:

1. Consult a bankruptcy attorney first (bankruptcy might be better option)
2. Save money while not paying mortgage (typically takes 6-18 months to foreclose)
3. Understand your state's deficiency judgment laws
4. Get everything in writing from lender
5. Move out before forced eviction

Preventing Future Negative Equity

If you escape negative equity, protect yourself from it happening again:

1. Larger down payments: 20%+ down provides significant buffer against market declines

2. Avoid cash-out refinances: Don't treat your home like an ATM. Equity is your safety net.

3. Buy in stable markets: Research market volatility history. Some markets (Detroit, Las Vegas, Phoenix in 2008-2012) experience wild swings.

4. Make extra principal payments: [Build equity faster](/blog/equity-building-strategies) than the market can erode it.

5. Don't buy at obvious peaks: If prices increased 30% in two years and everyone is panic-buying, wait.

6. Ensure job stability: Most negative equity disasters happen when market declines + job loss coincide.

The Psychology of Being Underwater

Beyond the numbers, negative equity is emotionally draining:

• Regret: "I should have waited to buy / not done that cash-out refi"
• Trapped: "I can't move even if I want to"
• Embarrassment: "Everyone else is building wealth and I'm losing money"
• Fear: "What if values drop more?"

These feelings are normal. Remember:

1. It's not permanent. Markets recover. With normal payments and 3% appreciation, most moderate negative equity resolves in 3-5 years.

2. You're not alone. 2-3% of homeowners are underwater right now. Millions more were during 2008-2012 and recovered.

3. Housing is shelter first, investment second. If you can afford the payment and have a place to live, you're doing okay even if the equity number is negative.

4. Credit stays intact if you keep paying. Unlike foreclosure or short sale, staying current means your credit isn't damaged.

5. This too shall pass. Real estate is cyclical. What goes down eventually comes back up (though timing varies).

When to Seek Professional Help

Talk to professionals when:

HUD-approved housing counselor (free): Helps you understand options, negotiate with lenders, avoid scams

• Find one at HUD.gov or call 1-800-569-4287

[Real estate attorney](/blog/how-to-build-real-estate-team): When facing foreclosure, considering short sale, or dealing with deficiency judgments

Tax professional: To understand implications of debt forgiveness, 1099-C reporting, and potential exclusions

Financial planner: To evaluate long-term impact of each option on your overall financial picture

Bankruptcy attorney: If underwater mortgage is part of larger financial crisis

Don't go it alone. Most of these consultations are free or low-cost, and they can save you tens of thousands of dollars in mistakes.

The Bottom Line

Being underwater on your mortgage is stressful, but it's not the end of the world. You have options:

• If you can afford payments and don't need to move: Stay put, make extra payments when possible, and wait for recovery (2-5 years typically)

• If you're struggling with payments: Pursue loan modification or special refinance programs

• If you must relocate: Consider renting the property out

• If you must sell and can't afford to bring cash: Explore short sale

• If you're in severe distress: Consult professionals about deed-in-lieu or other options

The key is action. Don't ignore the situation hoping it resolves itself. Research your options, run the numbers, talk to professionals, and make an informed decision.

Most homeowners who were underwater during the 2008-2012 crisis and stayed put eventually recovered. With strategic patience and consistent payments, you can too.

Related Articles

• [Home [Equity Explained](/blog/home-equity-explained): What It Is and How to Build It](/blog/home-equity-explained)
• Amortization Schedule Guide: How Your Mortgage Payment Breakdown Changes Over Time
• Blended Family Home Planning: Merging Households and Managing Home Equity