How to Deal With an Underwater Mortgage

By Ashley Kilroy · November 04, 2022 · 8 minute read

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How to Deal With an Underwater Mortgage

Rather than live in fear or denial, it’s smart to seek help if you think you’re holding a mortgage worth more than your home.

Being underwater or upside down isn’t exactly a comfortable position. Here’s what to know and what to do.

What Is an Underwater Mortgage Exactly?

Your home’s worth can shift while you’re paying it off. Having an underwater mortgage, or an upside-down mortgage, means you owe more on your home than it’s worth.

That puts homeowners in a tough situation: It affects their finances if they have to catch up on payments and hurts their chances of selling in the near future.

What Causes an Underwater Mortgage?

An underwater mortgage can result from missed payments or a property value decrease.

Let’s start with missed payments. From the moment you start paying off your mortgage loan, a process called amortization starts. A fully amortizing loan is one that is paid off by the end of its term if the borrower makes complete payments.

If you have a fixed-rate mortgage, you’ll make principal and interest payments in equal installments for the life of the loan.

During the early years, the bigger portion of your payments covers the interest. As time goes on, more of your payments go toward the principal. Enter an example and see the amortization chart of this mortgage calculator.

If you miss a payment, the interest will continue to build. Compounding interest makes it more difficult to pay off a loan since missing a payment forces you to make increased monthly payments that match the accumulated interest. Eventually, your home loan may go underwater.

Making payments depends on you, but a decrease in property value may be out of your hands because of market fluctuations.

Suppose you buy a house for $300,000. You make a down payment of $11,000, and your lender approves a loan for $289,000. Sometime later, a few of your neighbors go to sell their homes but face tepid buyer demand. So they lower their selling prices, which affects your property’s value.

Now you have a mortgage balance of, say, $240,000 on a home that is worth only $225,000.

How Do I Know If I Have an Underwater House?

Compare your current mortgage principal balance, which can be found on a mortgage statement, with your home value.

If you have a second mortgage on your home, be sure to add that balance to the first mortgage balance.

To check your home value, you can use a real estate database or talk to a local real estate professional. For a more concrete figure, you can pursue an independent appraisal.

If your home value is lower than your home loan balance, you’re upside down.

Those who fall behind early in their loan term may be more susceptible than others. They may have bought during a hot market, put little down, and have little equity.

What Are My Options If My Mortgage Is Underwater?

It’s hard on any homeowner who has no equity in their home. And many people are emotionally attached to their home, making the issue even more difficult to work through.

Some options may suit you better than others, depending on your situation.


Contact your lender or mortgage servicer immediately about your struggle to keep up with the house payments. A late payment will show up on your credit reports when it is at least 30 days overdue, and late payments stay on credit reports for seven years.

Some lenders allow borrowers to trim or pause mortgage payments short term through mortgage forbearance.

You may also be able to work out a repayment plan if you have fallen behind. Your lender or servicer will discuss the time frame and parameters if you want to pursue this option.

To boost your household income and keep the home, you or a partner may need to take on a second job or side hustle.

And you might need to cut back on spending. Small changes in your daily habits can add up.


Most lenders require you to have a minimum amount of equity in your home before you can refinance your mortgage.

Regular refinancing won’t be available to you if you’re underwater, but If you have an FHA, VA, or USDA mortgage, you might qualify for a rate reduction through a streamline refinance. There is no home appraisal, so you can often refinance with little or no home equity.

Even if you don’t think you qualify for refinancing, it’s worth talking to a lender. You might be surprised by the equity you gained as housing prices skyrocketed.


If you can’t financially recover enough to pay the current mortgage payments and missed installments, you could sell your underwater home and cover the difference with cash.

Or you could turn to a short sale as an alternative to foreclosure. In a short sale, the lender agrees to let you sell your home for less than what you owe on it. The lender makes the final call on whether or not an offer is approved.

Sale proceeds go to the lender, but most states allow lenders to obtain a deficiency judgment from the borrowers for the shortage.

As if having your wages garnished or bank account frozen to resolve the deficiency weren’t enough, a short sale will hurt your credit scores if the lender reports the deficiency balance.

Asking the lender to waive the deficiency could work.

Try a Deed in Lieu

If you’re unable to make your payments and are upside down on the mortgage, you could consider asking your lender if a deed in lieu of foreclosure is an option.

If it is, you would submit documentation about income and expenses in an attempt to deed the house back to the lender so that no foreclosure takes place.

The lender might require you to first attempt a short sale or look into a loan modification.

In exchange for giving the lender your deed and keeping the property in good condition, your lender may forgive your deficiency — the difference between what you owed and what the home is worth — or greatly reduce it.

A deed in lieu will hurt your credit but not as severely as a foreclosure would and will stay on credit reports for four years.

Allow Foreclosure

If you have no way to make up missed payments and the home is underwater, you might have to let the lender foreclose on the property.

If your lender has decided to foreclose, the Department of Housing and Urban Development offers help through approved housing counselors.

A foreclosure can cause your credit scores to take a nosedive, and will stay on your credit reports for seven years from the date of your first missed payment.

A bad credit score can affect other areas of your life. Credit comes into play when you apply for rental housing, get a cellphone contract, buy a car, or sometimes get a job. Buying a house after a foreclosure can be tough, though some lenders may agree to lend to someone three years after a foreclosure action, or two years in the case of a VA loan.

If what you owe exceeds what the foreclosure sale brings in, the difference is a deficiency. In some states, the lender can seek a deficiency judgment.

Avoiding an Underwater Mortgage

Some factors that contribute to an underwater mortgage are in your control, and some are not. Still, it’s better to preempt any possible situations that could lead you to have an underwater loan.

Staying alert can help you stay on track and avoid possibly damaging circumstances.

Make Timely Payments

Making payments on time will help you build equity and stay in a more secure position if property values drop. There are a couple of ways you can keep tabs on both your loan payments and your home’s worth.

Looking into property-buying sites can help you get a perspective on your home’s current value. Read up on how the market is fluctuating, which can help you predict any moves you may want to take in the future.

You also can view your amortization schedule or use an amortization calculator. Either is a valuable tool that can tell you where you currently are in your mortgage payments and where you will be in the future.

Assess the Market Before You Buy

Knowledge will always be one of your best shields against financial loss. It’s a good idea to look at local housing market trends for an extended period before you buy a home.

You may want to look into popular suburbs as well as the greater local area. You want to ensure you buy in a location that won’t immediately drop in price after you make the purchase.

That is especially important if you intend to move again within a certain time frame.

A real estate agent can advise you on the current and predicted market conditions to help you make the choice best for you.


If you think you may start to have trouble with your regular monthly payments but still retain some equity in your home, you may want to consider a traditional refinance or a no closing cost refinance.

Even if you are not immediately at risk for an underwater mortgage, you may want to know how to lower your mortgage payment.

Recommended: Guide to Buying, Selling, and Updating Your Home

The Takeaway

How to deal with an underwater mortgage? First, contact your lender early on, then know your other options for contending with an upside-down loan.

If you’re on an even keel, have equity in your home, and would like to change the terms of your mortgage, consider a mortgage refinance with SoFi. SoFi also offers a cash-out refi and fixed-rate home loans.

Check your rate on a refinance today.

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