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What to do with an Underwater Mortgage

What to do with an Underwater Mortgage


Property is an investment, and purchasing a home is generally viewed as a positive financial choice. You can reasonably expect your home to increase in value over the decades. The average price for a home in 1980 was roughly $65,000. In 2011, that number had increased to over $200,000. Today, most home buyers expect their home values to rise in a similar manner.

However, the market value of a home does not always rise. When the markets fall, some homeowners are left owing more than their home is worth. This is called an underwater mortgage.

Use this guide to learn more about what to do with an underwater mortgage and where you can find more information and help:

  1. What is an underwater mortgage?
  2. How do I know if my mortgage is underwater?
  3. What options do I have when dealing with an underwater mortgage?
  4. How can a realtor help?


What is an underwater mortgage?

In order to understand underwater mortgages, there are two concepts that one must know. They are fair market value (FMV) and mortgage balance.

The FMV of a home is how much a reasonable person is willing to pay for the home without being influenced unfairly. This is different from the home’s assessed value, which is for tax purposes. Theoretically, the two numbers should be similar, but they rarely are. Assessed values may lag behind FMVs because of the timeline when they are submitted, or they may be much higher than FMV when a person is being overtaxed.

Assessed values have very little to do with figuring out how much your home is worth, because it is not what the market says it is worth. Supply and demand dictate FMV. That is why when there are an abundance of homes on the market, FMVs tend to decline.

Mortgage balance is the total amount you owe the mortgage company. It is not the principal balance, which does not include fees and interest. If you have a second mortgage, this will be added to your mortgage balance to figure out if you are underwater.

An underwater mortgage means that your mortgage balance is higher than the FMV of your home. This can be an emotionally difficult thing to discover because it means you are not building equity in your home and are instead failing at breaking even. It hurts the ego to know that your monthly mortgage payments are eating away at negative equity rather than building equity for the future.

After the housing market crash of 2008, over 30 percent of homeowners were underwater in their mortgages. Thankfully, the market is recovering, and Zillow reported that in 2017, that number had dropped below 10 percent. Even with these improvements, that still means millions of Americans are currently underwater in their mortgages. That is why it is important to understand what it means to be underwater in your mortgage and what your options are.


How do I know if my mortgage is underwater?

It is generally not easy to determine in your head if your mortgage is underwater because that means there are large differences between what you owe and what your home is worth. Whether it is obvious or not, you should still verify how much you have in negative equity in order to plan your next steps.

If you look on your mortgage statement, it may not include the numbers that would be required to pay off your loan or your mortgage balance. Typically, they include the principal balance but may not include fees and accrued interest. In cases where you are delinquent on payments, it may be difficult to tell what your mortgage balance is. The only way to know for sure is to request a payoff statement from your mortgage company. How much money it takes to successfully close a loan account can be difficult to decipher, and payoff statements give transparent breakdowns of how much you actually would have to pay in order to be free of the mortgage.

Fair market value is difficult to accurately determine. The easiest way is to hire an appraiser, but they can be expensive. You can also look at nearby like-homes or consult with a real estate agent about what they would list the home for. Fair market value is not a science, and you can really only know what the fair market value of a home is when someone actually makes an offer. We can also help you determine what your home is worth here

To compute whether or not you are underwater, subtract the mortgage balance from the FMV of the home. If the result is a negative number, then your mortgage is underwater.


What options do I have when dealing with an underwater mortgage?

Financially, a person may feel helpless when they discover that their mortgage is underwater. It may feel that there is nothing to do but give up the home. However, finding out that your mortgage is underwater is not a signal to give up on the home, although it is important to carefully consider your options. A HUD-approved mortgage counselor can help during this time, and they are available free-of-charge to those who need them. Real estate agents may also be able to provide the assistance necessary to to help. Not only do they have relevant experience helping other people who are struggling with mortgages, but they also have the networking and sales experience to help pursue available options.

The standard options available when dealing with an underwater mortgage are:

Stay in the home

If you are not planning on moving or selling the home, then staying put may not be such a bad idea. It keeps your mortgage current and you don’t have to disrupt your life by trying to find a way out.

However, if you are “deep” underwater, then you may not be able to to start building equity even after years of making on-time mortgage payments. If this is the case, it may not make financial sense to stay in the home. You should consider your other options.

One hopeful action one may be able to take if planning on remaining in the home is getting the home reassessed, which could possibly lower property taxes.


Negative equity can be a deal-ender for refinancing, but it is possible. Since 2009, homeowners who are eligible could apply for refinancing through the Home Affordable Refinance Program (HARP). This program was discontinued at the end of 2018, but replacement programs offer different benefits for Fannie Mae and Freddie Mac loans.

Fannie Mae’s HARP replacement is called the High Loan-to-Value Refinance Option.

Freddie Mac’s HARP replacement is called Enhanced Relief Refinance.

In order to qualify, borrowers must have Fannie Mae or Freddie Mac loans, and the loan must benefit the borrowers by lowering payments or interest rates. Homeowners can also qualify if converting to a fixed rate loan or shortening the term of their loan. Mortgage payments must be up-to-date with no missed payments in the previous six months and not more than one missed payment in the past year.

One of the most positive aspects of these new “streamline” loan programs is that you must have a loan-to-value of over 95 percent, meaning you can only get this refinance option if you have little or no negative equity. Essentially, these streamline refinance options are available for people who have underwater mortgages.

The two refinance options are available for loans that began at any time period, and they can be streamlined repeatedly over time. These two features are advantages over the previous HARP option.

If you don’t have a Fannie Mae or Freddie Mac loan to qualify for these programs, there are others for which you may be eligible. FHA loans have a streamline option called the FHA Streamline Refinance Program. The VA offers an Interest Rate Reduction Refinancing Loan (IRRRL). In most cases, as long as you have a good payment history, there will be an option available to help you get out from an underwater mortgage.

Short sale

A short sale means selling your home for less than you owe. In some cases, the mortgage company will even forgive the rest of the debt. This option was made for situations like underwater mortgages where the fair market value of the home falls greatly below the amount owed.

A short sale does hurt your credit, but not as much as a foreclosure or bankruptcy, and it does improve your financial situation because you no longer are in debt for more money than you could get out of your home in a sale.

One of the biggest things to look out for in short sales is a deficiency judgement, which is when the bank sues for the remaining money owed after the short sale. Don’t assume they are forgiving the remainder unless it is in writing. In Idaho, there is a time limit in which a bank can sue for a deficiency judgement, and that time limit is 3 months following a foreclosure sale. Other lien holders may have different time limits. Talk to a mortgage counselor to find out more about your state’s laws.

Short sales are often handled by real estate agents with knowledge of the process and the courts are not always involved. That is why it is important to find out whether or not the short sale eliminates the chances of a deficiency judgement. Working with an experienced real estate agent will increase the transparency of the short sale.

Loan Modification

When a refinance is not possible, and a person does not want to sell, loan modification may be an option. This is when you negotiate new terms for the loan. For example, you may negotiate a lower interest rate or an extended term. In rare cases, a loan modification may lower the principal balance on the loan.

Loan modifications can negatively affect your credit, and in the rare case where principals are reduced, you can owe taxes. If reported as a new loan, it will have minimal impact, and you may be able to pay down your loan quicker. Definitely discuss your options with your lender, but also confer with a mortgage counselor or financial specialist who will keep your best interests prioritized. Generally speaking, mortgage companies care that they get their money, and borrowers can end up unintentionally paying more due to complexities and legalese.

Deed-in-lieu of foreclosure

A deed-in-lieu of foreclosure is exactly what it sounds like. You give your bank the deed to the house, and they forgive your debt. In cases where a person is at risk of foreclosure but not underwater, they lose their equity in the home. When a person is underwater, the biggest impact is the negative impact on credit scores.

Deed-in-lieu of foreclosure is, generally speaking, a better choice than foreclosure or bankruptcy, but the lender has to agree to it, and they may not when you are underwater.


Foreclosure is when the lender takes possession of the home when the buyer falls behind on their payments. Generally this process starts after about three months of missed payments.

Walking away from your home loan is an option when you are underwater, and this is sometimes called a strategic default. It allows the lender to foreclose on your property, and it is different from standard foreclosures only in that it is voluntary.

Foreclosure will still cause a major hit to your credit score, but it will not last forever. In some cases, the length of time it takes to raise credit is the same amount of time or less than it would take get yourself out of being underwater.


Bankruptcy does not always erase mortgage debt, but it can get rid of other debt that could allow you to pay off more of your mortgage. In some cases, it also forces banks to work with you on payment options such as delaying or lessening payments for a certain period of time.

Reaffirming your mortgage following bankruptcy can ensure that the bank allows you to keep the home because they have your promise to pay. However, some people are able to “stay-and-pay” with no affirmation and no consequence from their mortgage company.

Each bankruptcy case differs, but one thing all bankruptcies have in common is the detrimental impact to credit scores. With that said, it may still be a better option than being underwater.


How can a realtor help with an underwater mortgage?

An experienced realtor can help you to wade through the multiple choices available when you are underwater. Especially when handling short sales, which can be very complex, a knowledgeable realtor with experience can be a life saver.

Contact Real Estate by Design today to receive help with your underwater mortgage. William Lowery is a Certified Default Advocate who helps people struggling with their mortgages to come up with beneficial solutions that have the least negative impact on finances. Being underwater may seem like a neverending downward spiral of debt. However, with help, you can work your way out of it.


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