Do you have an underwater mortgage? Here are your options

As measured by prices, home values have tended to go up over time. A report for Q4 2024 from ATTOM, a leading real estate data firm, shows just 2.5% of mortgage holders have an underwater mortgage, meaning they owe more on their home than it’s worth.

The fact that most people aren’t impacted by negative equity may be of little comfort if you’re someone who is upside down on your house. There’s no doubt that it can be a very stressful situation. You may fear needing to move quickly and having to take a financial loss. It can also create financial strain because a lack of existing equity can make it difficult to refinance. While feeling trapped is understandable, you may have options to help.

What does underwater mortgage mean?

An underwater mortgage occurs when you have a higher principal on your home loan than the monetary value of the home itself. The most common reason for this is property values having fallen since you bought your home. Although it’s common to hear of an upside down house, this can happen on any loan requiring collateral. For example, new cars tend to depreciate 30% in the first 2 years, according to Kelley Blue Book.

How does an underwater mortgage happen?

You can end up owing more than your home is worth in two ways: declining property values and/or falling behind on payments. Let’s do a couple of quick examples.

Last year, you bought a $300,000 home with a 3% down payment. Since then, you’ve paid the balance down almost a full percentage point, but you still owe $288,043.99. In the meantime, values of comparables have fallen so that selling prices in your market are $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, with the rest going to 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, arm yourself with information in place of speculation. This will help you determine what challenges may apply and the best way to move forward.

Find your existing mortgage balance

Your current mortgage balance is reflected 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, the best thing to do is take stock of property values for comparable homes in your area. You don’t have to scour property tax records for four-bedroom colonials with similar square footage. With Rocket.com, you’re able to check out estimated value for your home (or any other). If your mortgage balance is higher than your property value, you may be underwater, but there’s only one way to know for sure.

Get a home appraisal

Because the cost of an independent appraisal can be significant, you would only do this if you planned to refinance or sell shortly, but this 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.

Why having an underwater mortgage is risky for homeowners

Lacking existing equity can cause various issues for homeowners. Let’s take a brief survey of the challenges before we look at solutions.

Refinancing can be more difficult

You’ll find options may be limited if you’re looking to refinance into a lower rate and/or payment while you’re underwater on a mortgage. There are options that you may be able to take advantage of, but you’ll find more avenues open for you when you reach 3% – 5% equity in most cases.

Selling may take more effort

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

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

Because refinancing is more challenging, it can make it hard to get into a more affordable mortgage when the market would otherwise allow.  If down the line you find yourself in financial hardship, being stuck in a higher payment could increase the risk of foreclosure, losing your home to the lender when you can’t make your payments.

Know that if you find yourself in this situation, assistance may be available. Reach out to your servicer. Servicers want to do everything they can to help you stay in your home. With limited exceptions, any relief does have an impact on your credit, but it’s not going to be as bad as a foreclosure on your record.

Rocket Mortgage clients can reach us by going to the Mortgage tab in their Rocket Account and navigating to Help > Payment assistance.

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

While options are limited and you can’t take cash out if you have no equity, 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, VA, or USDA loans. This means 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.

In addition to already needing to be in a loan backed by the government, there are other requirements. For example, you need to be current on your payments with no late payments in the last 6 months and for the previous mortgage to be at least 6 months old on FHA and VA Streamlines. There’s also a minimum benefit test that must be passed regarding the new payment.

2. Stay in your home and build equity

If you have the time and financial resources, the best thing to do may be to keep making your payment and let the problem resolve itself. As you make your payments, your balance will steadily come down over time. This is going to eventually bring you out from being underwater on the mortgage. If property values eventually pick back up, this will happen even faster. It can make a lot of sense to wait it out and let the situation resolve itself.

3. Consider a short sale

In terms of impact to your financial future, if refinancing or staying in your current home aren’t possible, a short sale may be the next best alternative. You’ll need to show a hardship, and the plan has to be approved by your servicer. A short sale involves selling the property for its current market value, but below what you owe. Servicers pick the winning offer and may give you cash consideration for maintaining the home.

The reason this could be the best option is that the FHA allows you to get into another mortgage right away as long as 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 have to 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 has to agree to it. This only makes sense if you have to leave the property in a hurry because the credit impact is similar to that of a traditional foreclosure.

There are certain things that are similar to the way a short sale works. You should again find out the policy regarding deficiency judgments. The servicer may also be willing to give you financial consideration if you keep the home up prior to moving out.

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

While there’s no denying the financial impact that can be caused by owing more on your home than its current market value, the best thing to do may be to wait for the market to rebound as you continue to make payments. In some circumstances, you may even be able to refinance into a more favorable rate or payment on a government-backed loan if the market dictates. If you’re interested, start a refinance application.

If you can’t refinance or maintain your current payment, options for relief may still be available. Be sure to reach out to your servicer. Rocket Mortgage clients can get in touch through the Mortgage tab of their Rocket Account under Help > Payment assistance.