Underwater Mortgage: What It Means and What to Do

Owing more than your home is worth is one of the most stressful financial situations a homeowner can face. But take a breath—you're not alone, and you have options.

This guide explains what an underwater mortgage means, how it happens, and the seven paths forward depending on your situation.

What Is an Underwater Mortgage?

An underwater mortgage (also called negative equity or being "upside down") means your loan balance exceeds your home's current market value.

Example:

• Home value: $350,000
• Mortgage balance: $400,000
• Underwater by: $50,000

In this scenario, if you sold the home, the proceeds wouldn't cover what you owe. You'd need to bring $50,000 to closing (plus selling costs) or negotiate with your lender.

How to Know If You're Underwater

Here's how to check your situation:

Step 1: Find Your Loan Balance

• Check your most recent mortgage statement
• Log into your servicer's online portal
• Call your servicer and ask

Step 2: Estimate Your Home's Value

• Use online estimators (Zillow, Redfin, Realtor.com)—but know they can be off by 5-15%
• Look at recent sales of similar homes in your area
• For a more accurate number, get a professional appraisal ($400-$600)

Step 3: Do the Math

• Home Value - Mortgage Balance = Equity (or negative equity)
• If the result is negative, you're underwater

Example calculation:

• Zillow estimate: $340,000
• Redfin estimate: $355,000
• Average: $347,500
• Mortgage balance: $385,000
• Result: Approximately $37,500 underwater

The Good News: You're Not Alone

Being underwater feels isolating, but it's more common than you might think:

• Currently: About 2% of mortgaged homes are underwater (roughly 1 million properties)
• Historical context: At the peak of the 2008-2009 crisis, 25% of homes (nearly 13 million) were underwater
• Recovery happens: The vast majority of those homes are now above water

Markets recover. Home values, over the long term, trend upward. If you can stay in your home and keep making payments, time often solves the problem.

How Did This Happen?

Understanding why you're underwater helps you choose the right path forward:

Bought at a Market Peak

If you purchased when prices were high and the market subsequently declined, you may have bought in more house than the market currently supports.

Low or No Down Payment

Putting little money down means you start with minimal equity. Even a small price decline puts you underwater.

Cash-Out Refinance or HELOC

If you previously borrowed against your equity and values later dropped, you may owe more than the home is worth.

Local Market Decline

Sometimes specific areas decline due to job losses, natural disasters, or other local factors—even while national prices rise.

Short Ownership Period

Equity builds slowly in the early years of a mortgage (most payment goes to interest). If you bought recently and values haven't risen, you might be underwater.

Your 7 Options

You have more options than you might think. The right choice depends on your ability to make payments, how long you can stay, and your long-term goals.

1. Stay and Wait

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

The simplest approach: keep making your mortgage payments and wait for the market to recover. Over time:

• Your principal balance decreases with each payment
• Home values typically appreciate
• The gap closes from both directions

How long does recovery take? It varies widely by market. Some areas recovered from 2008 in 3-5 years. Others took 10+ years. National appreciation averages 3-4% annually.

2. Pay Down Principal Faster

Best for: Homeowners with extra cash who want to accelerate getting above water

If you can afford it, make extra principal payments to reduce your balance faster:

• Biweekly payments add one extra payment per year
• Round up your payment to the nearest hundred
• Make periodic lump-sum payments

The faster you reduce your balance, the sooner you reach positive equity.

3. Refinance (If You Qualify)

Best for: Homeowners with improving situations or special program eligibility

Traditional refinancing requires equity, but some programs help underwater borrowers:

• FHA Streamline Refinance: If you have an existing FHA loan, you may refinance without an appraisal
• VA IRRRL (Interest Rate Reduction Refinance Loan): Veterans with VA loans can refinance even with negative equity
• High LTV refinance programs: Some lenders offer refinancing up to 125% LTV in specific situations

Check with your current servicer about underwater refinance options. They have more flexibility than you might expect because they'd rather keep you current than deal with default.

4. Loan Modification

Best for: Homeowners struggling to make payments

A loan modification changes your loan terms without refinancing. Your servicer might:

• Reduce your interest rate
• Extend your term to lower payments
• In some cases, reduce principal (rare but possible)

How to pursue: Contact your servicer and ask about hardship programs or loan modification. Be prepared to document your situation with income statements, bank statements, and a hardship letter.

Modifications hurt your credit less than foreclosure and keep you in your home.

5. Short Sale

Best for: Homeowners who need to move and can't bring cash to closing

A short sale means selling your home for less than you owe, with your lender's approval to forgive the difference.

Process:

1. Contact your lender about short sale approval
2. List the home with a real estate agent
3. Lender must approve any offer
4. Closing proceeds go to lender; remaining debt may be forgiven

Considerations:

• Takes 3-12 months to complete
• Credit impact: 100-150+ point drop
• You may owe taxes on forgiven debt (consult a tax professional)
• Better for credit than foreclosure

6. Deed in Lieu of Foreclosure

Best for: Homeowners who can't sell and can't afford payments

A deed in lieu means you voluntarily transfer ownership to the lender in exchange for debt forgiveness.

Advantages over foreclosure:

• Faster process
• May negotiate better terms (moving assistance, timing)
• Slightly better credit impact
• Avoids public foreclosure record in some cases

Requirements: The lender must agree, and you typically can't have other liens on the property.

7. Foreclosure (Last Resort)

Best for: No one—avoid if possible

Foreclosure means the lender takes your home through legal process after you stop making payments.

Consequences:

• Credit score drop: 150-200+ points
• Stays on credit report for 7 years
• May owe deficiency balance in some states
• Difficult to buy another home for years

Foreclosure should be the absolute last resort. Explore all other options first.

Can You Still Get a HELOC?

If you're underwater, the short answer is: very unlikely.

HELOCs require equity. Most lenders require at least 15-20% equity after the HELOC. If you have negative equity, you're nowhere close to qualifying.

What you'd need:

• Significant home appreciation to create equity
• Substantial principal paydown
• Or both

Once you're back above water with sufficient equity, you can explore HELOC options.

Programs That Can Help

Contact Your Servicer First

Your mortgage servicer has the most power to help. Call them, explain your situation, and ask about:

• Forbearance (temporary payment pause)
• Loan modification
• Refinance programs
• Hardship assistance

HUD-Approved Housing Counselors

Free counseling services can help you understand options and navigate the process:

• Find one at: hud.gov/findacounselor
• Or call: 1-800-569-4287

State Housing Finance Agencies

Many states offer hardship assistance programs for struggling homeowners. Search "[your state] homeowner assistance program."

VA Loan Assistance (Veterans)

Veterans with VA loans have additional options. Contact the VA directly at 1-877-827-3702.

What NOT to Do

Don't Just Walk Away

"Strategic default" (choosing to stop paying even though you can afford it) has serious consequences:

• Major credit damage
• Potential deficiency judgment in many states
• Tax consequences
• May affect future employment and housing

Don't Fall for Scams

Be extremely cautious of anyone who:

• Guarantees loan modification approval
• Asks for upfront fees before providing services
• Tells you to stop communicating with your lender
• Promises to "save your home" for a fee

Legitimate help is available for free through HUD-approved counselors.

Don't Ignore the Problem

The sooner you address underwater mortgages, the more options you have. Waiting until you're behind on payments limits your choices.

Frequently Asked Questions

How long does it take to get above water?

It depends on your market's appreciation rate and how quickly you pay down principal. National appreciation averages 3-4% annually. If you're 10% underwater, that might take 3-5 years with no extra payments.

Can I sell my house if I'm underwater?

Yes, but you'll either need to:

• Bring cash to closing to cover the shortfall
• Get lender approval for a short sale
• Wait until values recover

Will I owe taxes on forgiven debt?

Possibly. Forgiven mortgage debt is generally taxable as income. However, exceptions exist (like the Mortgage Forgiveness Debt Relief Act, when applicable). Consult a tax professional before pursuing short sale or deed in lieu.

Does being underwater affect my credit score?

Not directly. Being underwater doesn't appear on your credit report. What affects your credit is missed payments, short sales, or foreclosure—not the equity position itself.

Can the bank call my loan due if I'm underwater?

Not typically. As long as you're making payments, your lender can't call the loan due just because you're underwater. The underwater status itself doesn't trigger default.

The Bottom Line

Being underwater on your mortgage is stressful, but it's not permanent. Markets recover. Principal balances decrease. Time often resolves the problem if you can stay in your home and keep making payments.

If you can't stay or can't afford payments, explore options with your servicer before things get worse. Free help is available through HUD-approved counselors.

And remember: millions of homeowners have been where you are and come out the other side.

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Markets change. When your equity improves, we'll be here to help you access it. Learn more about HELOCs for when you're ready.