Underwater Mortgage

An underwater mortgage occurs when the outstanding principal on a home loan is greater than the home’s current market value. This situation—also called negative equity—can limit refinancing or selling options and increase financial vulnerability if home prices fall.

Key takeaways

• An underwater mortgage means you owe more than the home is worth.
• Negative equity can prevent refinancing and make selling difficult without paying the shortfall.
• Homeowners should monitor property values and explore options such as refinancing, loan modification, short sale, or staying put to rebuild equity.

How an underwater mortgage works

Equity = home market value − mortgage balance.
A mortgage becomes underwater when that calculation is negative.

Example:
* Mortgage balance: $250,000
* Current home value: $225,000
Result: $25,000 negative equity (underwater).

If you’ve paid down principal, equity can still be positive even if the original loan exceeded the purchase price. Whether you have options like home-equity loans depends on positive equity.

Why it happens (brief history)

Many homeowners experienced underwater mortgages during the 2008 financial crisis after housing prices fell sharply. Loose lending standards and a surge in defaults contributed to a housing-market decline. Since then, tighter mortgage underwriting and policy responses helped stabilize prices, but negative equity can still occur when local markets or home values decline.

How to assess your home’s value

• Order a professional appraisal for the most reliable estimate.
• Review recent sales of comparable homes (comps) in your neighborhood.
• Use reputable online valuation tools for a quick check—treat estimates as indicative, not definitive.
• Maintain and improve the property to support its market value.

Options if your mortgage is underwater

1. Continue making payments
2. Build equity over time as you pay down principal or if home values recover.
3. Refinance or modify the loan
4. Refinancing may be limited when negative equity exists; loan modification or loss-mitigation programs might be available through your lender.
5. Sell and pay the difference
6. You can sell, but you must cover the shortfall between sale proceeds and the mortgage balance unless the lender agrees otherwise.
7. Short sale
8. Lender approves a sale for less than the outstanding mortgage. It can help avoid foreclosure but will likely affect credit.
9. Deed-in-lieu of foreclosure
10. You voluntarily transfer the property to the lender to satisfy the loan. It generally has less severe credit impact than foreclosure but still affects credit history.
11. Foreclosure (stop paying)
12. This is a drastic step with long-lasting negative effects on credit and future borrowing.
13. Seek counseling
14. HUD-approved housing counselors or nonprofit credit counselors can explain options and negotiate with lenders.

Each option has different eligibility rules, costs, and credit consequences—consult your lender or a housing counselor before deciding.

Frequently asked questions

Q: Can you sell a house with an underwater mortgage?
A: Yes, but you must either pay the difference between the sale price and the mortgage balance or obtain lender approval for a short sale.

Q: How do I get out of an underwater mortgage?
A: Options include staying and building equity, refinancing or modifying the loan (if eligible), short sale, deed-in-lieu, or, as a last resort, foreclosure. Professional advice can help you choose the best path.

Bottom line

An underwater mortgage means owing more than your home is worth and can complicate refinancing or selling. You have multiple options—from continuing payments to negotiated solutions with your lender—but each has trade-offs. Monitor home values, consult your lender or a qualified housing counselor, and weigh short- and long-term effects before acting.