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Underwater Mortgage: What Is It and What Can You Do?

Last updated 03/28/2024 by

Ossiana Tepfenhart
An underwater mortgage is a mortgage that has a higher principal balance than the current market value of the home. This can have long-reaching issues for both borrowers and lenders.
If you listen to the news, you already know that an underwater mortgage is not something you ever want to have. It often leads to major financial upheaval and prevents people from selling their homes.
During the Great Recession of 2008, financiers and homeowners alike were terrified of having more mortgages go upside-down. It was often the death knell of a family’s finances. But, what does having an underwater mortgage loan mean?

What is an underwater mortgage?

An underwater mortgage, also known as an upside-down mortgage, occurs when you owe more on your home than what it’s currently worth. If your mortgage is underwater, you cannot sell and pay off the home. An underwater mortgage occurs when you have a home that is worth less than what you owe on it. For example, if your home was worth $200,000 but you owe $400,000 on it, your home would be considered underwater. In some areas, this is also known as an “upside-down mortgage.”

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How does an underwater mortgage happen?

It’s clear that no one wants to have a home go underwater. There are several reasons why a home’s mortgage might be underwater. The most common reasons include:
  • There is a massive economic recession that affected your home’s value. During the 2008 Financial Crisis, the real estate bubble burst. Real estate market conditions went from favorable to unfavorable. This led most parts of the country to see a major dip in property values.
  • You bought your home with little to no money down, or have a reverse mortgage. This is one of the most common reasons why your loan balance would exceed your home’s price, especially during volatile times. Subprime mortgage loans can cause this.
  • A major unfavorable construction project has caused you to go underwater on your mortgage. Living next to a highway, for example, would cause most home values to drop.
  • Crime rates and urban blight brought your home value down. This usually occurs over the course of several years. However, in the riots of Newark during the 60s and 70s, this often felt like an overnight experience.
In some financial groups, you are only really considered to be underwater if you owe more than $15,000 more than what your home is worth. However, this is not always the case. Any amount of deficit between your mortgage and home value is underwater.

What did underwater mortgages have to do with the 2008 financial crisis?

Perhaps the most extreme example of widespread underwater mortgages occurred during the 2008 Financial Crisis. During this crisis, the real estate market was in the middle of a major bubble. Homes were priced far above what their true value was, and then borrowers were given subprime mortgages they couldn’t really afford.
When the market crashed, thousands of people lost their jobs. This made them unable to afford their mortgages. Those with home equity tried to do a short sale, but often found their short sales denied.
Chaos ensued. The job loss and upside-down mortgages caused serious strife. This led to many people choosing to leave their homes or doing something illegal like a silent second mortgage. This turned into a major housing crisis that affected home prices across the country.

What’s the trouble with underwater mortgages?

If your home goes underwater, you’re going to be in trouble, even if you are paying your mortgage payments on time. However, this isn’t always a problem. It generally is only an issue if you want to move, sell your home, or want to get a refinance plan going on.
Simply put, if you owe more than what your home is worth, it will lead to negative equity and that will make most major home payment decisions difficult.
The good news is that in recent years, fewer and fewer homes are underwater. According to the latest report by Attom Data, mortgaged homes are 13 times more likely to be equity rich than seriously underwater. As the graph below shows, household home equity has increased dramatically since 2011.

How do you know if you’re underwater on your home?

If you are unsure whether you are one of the many people who have underwater mortgages, here’s how you can find out.
  1. Contact your mortgage lender and request a payoff statement of your existing loan. You just need to find out the remaining balance and how much your home equity is.
  2. Check to see if your loan is higher than what it was when you took out the loan. If interest rates ended up harming your mortgage balance and home values didn’t increase in your area, you’re underwater.
  3. Then, call a local real estate agent to find out how much your home is worth on the market. You don’t need to have a full appraisal, but you might want to know general comparable sales in your area. If you can, find out the current value of your home. If you notice that it’s far lower than what you paid for the home or how much you owe, you’re underwater.

Options for homeowners who have an underwater mortgage

Being underwater can be rough, but it’s not insurmountable. There are ways to make it work. Here’s what you need to know as far as your options go.
  1. Keep making your monthly mortgage payments. Believe it or not, most people who are underwater tend to see their problems resolve on their own if they continue to pay their mortgage payment every month. Every payment chips away at what your home’s loan balance is, which brings you closer to even. This way, you ride out the bad economy and keep your home.
  2. Consider doing a short sale. Short sales allow you to walk away from your mortgage by selling the house at a discounted price that matches property values. However, this is not always doable. To get a short sale, your lender has to approve the amount that it’s sold for. This acts as a loss on the home equity for the bank. Many banks won’t allow it due to the loss it can pose for them.
  3. Choose to sell the home and pay the difference out of pocket. This is also an option, but it can be a bit rough on wallets.
  4. You can also do a refinance on your home. If you made regular monthly mortgage payments and have less than 20 percent equity in your home, you might have been able to get a HARP to refinance package. However, HARP expired in 2018. You may need to pull a personal loan to cover the difference in your negative equity if it’s even possible. Generally speaking, this is a solution that is rarely, if ever, considered to be possible.
  5. Do a strategic default. If you cannot make monthly payments due to one reason or another, you may do a strategic default. This means that you are walking away from your home and waiting for a foreclosure to happen. This is often done when a short sale is not allowed.
  6. If you have an FHA loan, you may be able to get help through your loan servicer. Some FHA loans come with options that can help you pay your mortgage balance off even if the monthly payment amount isn’t affordable as is. You should ask advice from a HUD-approved counselor if you aren’t sure what to do.
  7. The bank may also foreclose on your house. If there is any way to avoid this, you should. Foreclosure and bankruptcy will negatively impact your credit score and life.

What’s the best way to get out of an underwater mortgage?

Honestly, in most cases, it’s best to stick to your current mortgage and work towards paying off the loan amount. When you keep paying your mortgage, you build equity and ride out the current value of your home.
With hope, you will be able to reduce your current mortgage balance and actually have a decent amount of equity. Over time, home prices will generally increase. It’s a nationwide trend. The idea here is that you keep paying off everything until the property value rises and gets you out of the “water.”

What’s the best advice we can give you regarding underwater house loans?

Home prices fluctuate, and so do financial situations. If you have a home loan that you are unsure of, the best thing you can do is talk to a loan officer and a qualified mortgage expert to find out what your best options are.

Frequently asked questions

How can I get out of my underwater mortgage?

The most common ways to get out of an underwater mortgage is to continue to pay off the bills month after month, or to sell the house at a loss. Selling your home may be difficult, as your lender may require you to alert them.

What percentage of mortgages are underwater?

During the Great Recession of 2008, underwater mortgages were fairly common. However, the rate of underwater mortgages decreased in recent years. According to a 2022 study by Attom Data, only 3.1% of mortgaged homes, or 1 in 32, were seriously underwater in the fourth quarter of 2021. In this study, seriously underwater was defined as owing 25% more than the market value of your home.
The same study shows 41.9% of mortgages are equity rich, which means the loan balance was 50% or less of their market value. In other words, mortgaged homes are 13 times more likely to be equity rich than seriously underwater.

What is it called when you owe more than your house is worth?

It’s called “being underwater” or being upside-down on your home. Any home mortgage loan can be underwater if unfortunate circumstances arise.

Can you refinance if your house is underwater?

If your home is currently underwater, you probably are not going to be able to refinance anytime soon. Unless you now have equity in your house, it’s a no-go. Since HARP expired, the vast majority of mortgage lenders are unwilling to work with underwater homes.

Key takeaways

  • Underwater mortgages are homes that owe more on a mortgage than they are worth.
  • The most common ways to get out of an underwater loan is to continue to make payments, sell your home, or go into a planned default.
  • If you are not looking to move or refinance, an underwater home will not harm your day-to-day life.
  • Most underwater mortgages were sparked by the 2008 Financial Crisis and subprime mortgages.

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