Do you have an underwater mortgage? Here are your options

If a mortgage is underwater, it means the homeowner owes more on the mortgage than the home is currently worth. According to Q4 2025 data from ATTOM, a leading real estate data firm, 3% of residential mortgaged properties are at least 25% more than the estimated property value and are currently underwater. That figure is up from 2.5% at the same time the previous year.

Typically, when you make mortgage payments, you build equity in your home. If your mortgage is underwater, that means you have negative equity. It’s a stressful situation for any homeowner, but if you find yourself with an underwater mortgage, it’s important to know what your options are. Here’s a closer look at what an underwater mortgage is and what to do if you end up with one.

What does underwater mortgage mean?

An underwater mortgage – also known as an upside-down mortgage – occurs when you have a higher principal on your home loan than the current value of the home. This means you owe more on the home than it’s worth. The most common reason this can happen is if property values have fallen since you bought your home. A lack of existing equity can make it difficult to refinance¹ , take out a second mortgage, or sell the home.

How does an underwater mortgage happen?

You can end up owing more than your home is worth if property values decline or you fall behind on mortgage payments.

Here’s an example. Let’s say you bought a $300,000 house and you still owe $288,000 on it. In the meantime, values of comparable properties in your area have fallen, and home appraisals and sales prices are around $286,000.

The other way to find yourself upside down on your mortgage is to fall behind on payments. With each monthly payment, a portion goes toward paying off the balance and a portion goes toward paying interest. If you miss a payment, not only does your balance not go down, but you can end up owing more based on accrued interest. The interest you owe on each payment depends on your loan amount and the interest rate.

How to know if your mortgage is underwater

If you’re concerned that you may owe more on your home than it’s worth, here are some ways you can tackle the situation.

Find your existing mortgage balance

Your current mortgage balance is listed on your most recent mortgage statement from your servicer. Rocket Mortgage clients can find their mortgage statement in the documents section of their Rocket Account. Depending on your preferences, this may also be mailed to you.

Determine local property values

To get an idea of where you stand, take stock of property values for comparable homes in your area. With Redfin², you’re able to check out estimated value for your home – or any other. Keep in mind this is just an estimate, and you’ll need to order an official appraisal to get confirmation of the home’s current market value.

Get a home appraisal

Ordering a formal appraisal is the best way to determine the exact value of your home in the current market. An appraiser evaluates your home by comparing it with similar properties in your area that have recently sold. You’re upside down on your home if the appraised value comes in below your current balance. Because the cost of an independent appraisal can be significant, it may only be worth paying for if you’re planning to refinance or sell.

Why having an underwater mortgage is risky for homeowners

Not having equity can cause issues for homeowners. Let’s take a brief survey of the challenges before we look at solutions.

Refinancing can be more difficult

If you’re looking to refinance into a lower mortgage rate and monthly payment while you’re underwater on a mortgage, you’ll likely find that your options are limited. Lenders typically require you to have at least 20% equity in a home before you can refinance.

Selling may be trickier

Under normal circumstances, homeowners typically use the proceeds from the sale of their home to pay off their existing mortgage. If it’s not your last home, there’s ideally at least enough left over to make a significant contribution toward the down payment on your next one.

When the market won’t support you selling the home for enough to pay off your mortgage, you need to come up with the funds to pay off the balance. This can keep people in houses that no longer work for them until the market turns around.

There’s a risk of losing the home

If you fall behind on payments, you face an immediate foreclosure risk. Since you cannot simply sell the home to cover the debt, the lender could seize the property, and your credit score would suffer.

Know that if you find yourself in this situation, assistance may be available. Reach out to your servicer. Relief does have an impact on your credit, but it’s not going to be as bad as a foreclosure on your record.

If you are a Rocket Mortgage client struggling to make payments, explore our payment assistance options to see if a loan modification is available.

What to do if you have an underwater mortgage

While owing more on your home than it’s worth is challenging, there are also paths toward a brighter financial future. Let’s look at a few options.

1.  Look for new financing

You can’t take cash out if you have no equity, so your funding options will be more limited. You may have the option to refinance for a lower rate or to change your term if you’re already in a mortgage backed by the government.

In many cases, there’s no limit when it comes to loan-to-value ratios for those already in FHA, VA³, or USDA loans. These types of mortgages give you the ability to refinance regardless of the value of your home. While Rocket Mortgage doesn’t offer USDA loans, you should understand all the options available to you.

To be eligible for an FHA Streamline⁴ or VA Streamline⁵ refinance, you need to live in the home as your primary residence and be current on your payments with no late payments in the last 12 months.

2.  Stay in your home and build equity

If you have the time and financial resources, simply staying in the home and making your regular mortgage payments can resolve the problem over time. As you make your payments toward your principal balance, the amount you owe will steadily come down over time. If property values eventually pick back up, this will happen even faster.

3.  Consider a short sale

If refinancing or staying in your current home isn’t possible, a short sale may be the next best alternative. A short sale involves selling the property for its current market value but below what you owe. You’ll need to show a hardship, and the plan has to be approved by your servicer.

The FHA allows you to get into another mortgage right away if you have no late payments on your mortgage or other installment payments in the year prior to the short sale. You’ll need the same clean payment history in the 12 months leading up to your application. You also must meet credit score minimums, but it’s doable.

You should be aware that some lenders pursue deficiency judgments. In this circumstance, clients are responsible for the difference between what the property sells for and the remaining loan balance. Before pursuing a short sale, be sure to ask what the policy is and get it in writing.

4.  Do a deed in lieu of foreclosure

The final common option in this situation is a deed in lieu of foreclosure. In a deed in lieu, you voluntarily give up the property to your servicer. The servicer must agree to it.

The bottom line: There are ways to deal with an underwater mortgage

If you find yourself with an underwater mortgage, the most effective strategy is to continue making your payments while you wait for your equity to improve. If you’re struggling to make your mortgage payments, you can proactively request payment assistance.

You can start your Rocket Mortgage application today to explore your financing options.

¹Refinancing may increase finance charges over the life of the loan.

²Rocket Mortgage is an affiliated business of Redfin. All mortgage lending products and information are provided by Rocket Mortgage, LLC | NMLS #3030; www.NMLSConsumerAccess.org. Licensed in 50 states. For additional information on Rocket Mortgage or to receive lending services in the State of New York, please visit RocketMortgage.com.

³Rocket Mortgage is a VA approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

⁴The FHA Streamline program may have stricter requirements in some states. In order to qualify for the FHA Streamline program, an immediate .5% minimum reduction in interest and mortgage insurance premium is required. Some states may require an appraisal.

⁵The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rare or a 2% minimum reduction in interest rate on previous adjustable rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.