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Underwater on a Mortgage | What To Know

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In a Nutshell

It is possible to owe more money on a house than what the house is actually worth. This is called being underwater on your mortgage. If you are underwater on your mortgage, there are things you should know about the risks and options you have for refinancing or selling your house.

Written by Attorney Kimberly Berson
Updated July 26, 2023

Sometimes homeowners will owe more on their mortgage than what their home is worth. This is known as an underwater mortgage or an upside-down mortgage. The current value of the real estate is less than the loan balance. What can you do if you are in this situation? Can you sell your home? What if you are having difficulty paying your mortgage payments and your mortgage is underwater? This article will discuss what an underwater mortgage is. It will also discuss how this phenomenon occurs, the risks of an underwater mortgage, and the options available to you if you have an upside-down mortgage.

How To Know if Your Mortgage Is Underwater

A mortgage is considered underwater when the outstanding balance due to the lender is more than the current value of the real estate. When you have an underwater mortgage, you have no equity in the property or negative equity. Equity is the homeowner’s interest in the property. Equity comes after you subtract the mortgage and liens on the property from the market value of the property. 

The first step to determine whether your mortgage is underwater is to find out what the outstanding balance due on the mortgage is, which may be referred to as a payoff amount. The payoff will include the principal balance (the original amount you borrowed), interest, and any other fees that you owe. You may request a payoff statement from your lender or your loan servicer. 

The second step is to determine the market value of your home. An appraisal will give you the most accurate assessment of the value of your home. But, you can get a rough estimate of the home value on sites like Zillow. Compare the current value to the mortgage balance. If the mortgage balance is higher than the current value of the home, your mortgage is underwater. 

Some homeowners have more than one mortgage or lien on their property. They may have a second mortgage, junior liens, or a home equity line of credit (HELOC). What happens if the current value of the property is more than the first mortgage but is less than what is due when you add up the amount due on all the mortgages, liens, and HELOC? The home is underwater if the market value of the property is less than the total amount due on all of the mortgages, liens, and HELOC on the property.

How Does an Upside-Down Mortgage Happen? 

Underwater mortgages can occur for a variety of reasons. If there is a sudden drop in the housing market, this could result in an underwater mortgage. When there is an increase in home buying, this will drive up the price of homes. This happened before the housing crisis in 2008. Homebuyers took out big mortgages to cover the home purchase price. When the housing market crashed and home prices dropped, many homeowners were left with homes that were worth less than the total amount due on their high loans.

Another factor that affects the housing market is mortgage rates. When interest rates on mortgage loans increase, housing values sometimes decrease. When people can’t afford high mortgage rates and aren’t in the market to buy a home, this could cause your home value to decrease to an amount less than the amount due on your mortgage.

A rise in foreclosures can also lead to a downturn in housing prices. A foreclosure happens when a homeowner stops making mortgage payments and the lender then seeks to sell the home to pay the mortgage debt.  

Another factor that may lead to an underwater mortgage is how much you put down on the purchase of your home. If you made a small down payment when you purchased your home and the value of your home decreases, this could cause your mortgage to be underwater.

If a homeowner is having difficulty making mortgage payments and stops making monthly payments, late fees and other default-related fees are added to the amount due. This could lead to an underwater mortgage. Your mortgage payment is made up of principal and interest. The payment schedule made by the lender is based upon amortization schedules. Amortization is an accounting method that spreads out the loan payments over time. It will show how much of the monthly payment is used to pay interest and the principal balance. 

At the beginning of the mortgage, most of the monthly payment is applied toward paying interest, not the principal balance. So, if you stop making mortgage payments at the beginning of your loan, your principal balance will still be high and the risk of an underwater mortgage is greater. The good news is that an underwater mortgage may not remain underwater. If you continue to make your mortgage payments, you can build up equity in the home. 

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The Risks of Having an Underwater Mortgage

Having an upside-down mortgage is risky if you want or need to sell your home. You won’t be able to sell your home without lender approval if the mortgage is underwater. Also, if you don’t have equity in your home, you won’t be able to borrow against the equity in an emergency. Negative equity isn’t a good thing. If you can afford to make your monthly mortgage payments and you don’t need to sell your home, it may not matter that your mortgage is underwater. 

Another problem with an underwater mortgage is that traditional refinancing isn’t available. Refinancing allows a borrower to replace their old loan with a new loan. The new loan may have a lower interest rate or other more favorable terms. This opportunity is almost always unavailable to homeowners whose mortgages are underwater.

Underwater mortgages are also at a greater risk of foreclosure. This is because the monthly mortgage payments are usually pretty high and are difficult to pay. The good news is that underwater mortgages aren’t permanent. If you continue to make mortgage payments, the equity in your home will grow over time.

Your Options if You Have an Underwater Mortgage

There are options for people with underwater mortgages who can’t afford to pay their monthly mortgage payments, or have missed making payments. You might be able to enter into a short sale, a deed in lieu of foreclosure, or a refinance program. You’ll need to contact your loan servicer to discuss these options.

Short Sale

A short sale is an option for homeowners who want or need to sell their home, but the sales price of the home won’t cover the entire outstanding balance of their mortgage. If you are facing a foreclosure sale and have an underwater mortgage, a short sale may help you avoid a foreclosure sale. You will need lender approval to sell your house for less than the amount of the mortgage. Typically, you’ll need to apply for short sale approval with the loss mitigation department of the mortgage lender. You will need to show that the market value of your home is less than the mortgage. It may be helpful to work with a real estate agent in your area to determine the current value of your home.

One of the disadvantages of a short sale is that the lender might hold you responsible for the balance that is due after the sale. The lender may seek a deficiency judgment. This is the difference between the outstanding mortgage balance and the sale of the home. On the plus side, you’ll avoid a significant knock on your credit history that would accompany a foreclosure. The credit implications of a short sale are more favorable than those attached to a foreclosure.

Deed In Lieu of Foreclosure

A deed in lieu of foreclosure may help a homeowner to avoid foreclosure. The homeowner would transfer the property to the lender in return for the lender agreeing not to pursue foreclosure. This option is appropriate for people who have missed mortgage payments and are facing a foreclosure of their home. The homeowner will be able to control when they leave the home and not be forced out by a foreclosure sale. The borrower should negotiate a waiver of any deficiency or the right to recover any remaining balance due, after the sale of the property.  

Refinance Programs for Loans Owned by Fannie Mae and Freddie Mac 

Refinancing a loan replaces the old loan with a new loan. The new home loan could give you a lower interest rate or extend the term of the loan. A refinance can lower the monthly mortgage payment to an affordable amount. After the housing crash in 2008, the Federal Housing Agency (FHA) created a program called the Home Affordable Refinance Program (HARP). The program was designed to help people with underwater mortgages to refinance.  Because HARP has ended, Freddie Mae and Fannie Mae have come up with new programs to help people with underwater mortgages. 

The Freddie Mac Enhanced Relief Refinance Mortgage program helps borrowers who are current on their mortgage payments but aren’t eligible for traditional financing. Their ineligibility stems from the new mortgage exceeding acceptable loan-to-value limits. The loan-to-value (ltv) ratio is a ratio the lender uses to compare the loan amount to the property value. In traditional refinance situations, a mortgage that is more than the property value will exceed the loan-to-value ratio limits. Some of the requirements of Enhanced Relief Refinance are:

  • Freddie Mac must own your loan;

  • The note date of the loan being refinanced must be on or after October 1, 2017;

  • You need to be current with your mortgage payments;

  • You can’t have any 30-day delinquencies in making mortgage payments in the most recent six months, and you can’t have more than one 30-day delinquency in the past 12 months;

  • Your mortgage that is being refinanced must not have been previously refinanced through the Housing Affordable Refinance Program (HARP). This was a federal program that began in 2009 and ended on December 31, 2018.

For those who have mortgages owned by Fannie Mae, the Fannie Mae High Loan-to-Value Refinance Option (HIRO) may help you refinance your underwater mortgage. To be eligible:

  • The date of your loan must be on or after October 1, 2017;

  • A minimum of 15 months must have passed since the beginning of the loan;

  • You can’t have any late payments in the last six months and no more than one late payment in the last year;

  • The minimum loan-to-value (ltv) ratio is 97.01% for a single-family home.

Fannie Mae has a new refinance option called RefiNow. It was made available on June 5, 2021. It helps people with lower income to qualify for a refinance. Homeowners must have:

  • A Fannie Mae-backed mortgage secured by a 1-unit principal residence;

  • At current income at or below 80% of the Area Median Income or AMI;

  • No missed mortgage payments for the past six months and no more than one missed payment in the last 12 months; and 

  • A mortgage loan-to-value (ltv) of up to 97%, a debt-to-income ratio of 65%, and a minimum credit score of 620. The debt-to-income ratio compares your gross monthly income to your monthly mortgage payment.

Eliminating an Underwater Second Mortgage Through Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, homeowners might seek to strip the lien of an underwater second mortgage. This opportunity is only available if your home value is at or below the outstanding balance of the first mortgage. The second mortgage will be treated as an unsecured debt. You can only successfully strip a second mortgage at the end of a bankruptcy case. The first mortgage on a primary residence can’t be stripped in bankruptcy. If you are behind in making your mortgage payments, filing for Chapter 13 bankruptcy may help you pay back those payments via a 3-5 year repayment plan. You also may be able to seek a loan modification if the bankruptcy court where you file has adopted a loss mitigation program.

Let’s Summarize…

An underwater mortgage is a mortgage loan wherein the outstanding loan balance is more than the property value. This means that the homeowner has no equity in the real property. This will be an issue if the homeowner needs or wants to sell the home. It is also an issue if the homeowner wants to refinance. There are options available to people who have underwater mortgages and who are facing foreclosure or need to sell the home. Also, certain federally backed mortgages will allow a borrower with no home equity to apply for a refinance.

Written By:

Attorney Kimberly Berson


Kimberly Berson is an attorney with over twenty-five years of legal experience and a specialty in bankruptcy law and bankruptcy litigation. Additionally, Kim is an instructor in the paralegal certificate program at Hofstra Law School where she teaches Bankruptcy Law, Contracts La... read more about Attorney Kimberly Berson

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