What to do If You Have an Underwater Mortgage


An underwater mortgage is one of the most stressful situations you can face as a homeowner. Owing more than the value of your property makes it harder to sell or refinance, and it can feel as if you’re stuck. Since it can take years to dig yourself out of a hole, it’s important to understand your options.

1. Be patient and wait it out

An underwater mortgage isn’t the best situation, but the good news is that your property won’t be underwater forever.

The real estate market fluctuates on a constant basis. Home prices can be down one year and up the next year. So if you have an underwater mortgage today, your situation can change considerably over the next few years. In addition, as you pay down your mortgage balance, the amount you owe the bank may become better aligned with the property’s value. You can also recover some of your equity by making additional mortgage payments, which helps pay down the principal faster.

2. Refinance through HARP

Unfortunately, you won’t qualify for a traditional refinance when you’re underwater. Depending on your mortgage program, a traditional refinance requires a minimum 3% to 5% equity.

Refinancing can help you get a lower interest rate and reduce your monthly payment, and it’s the only way to switch from an adjustable-rate to a fixed-rate.

If your underwater mortgage prevents refinancing, talk with your lender about refinancing under the Home Affordable Refinance Program (HARP). This program doesn’t require equity, plus you can refinance up to 125% of your property’s value. There is one caveat. To qualify for this program, you must have a Fannie Mae or Freddie Mac mortgage.

3. Rent out your house

If you’re ready to move but can’t sell because of an underwater mortgage, another option is turning your primary residence into a rental property. The rent you receive from a tenant can cover the payment on your underwater mortgage, and you can get a new mortgage to purchase another property.

In the past, if you wanted to rent out your home and buy a new home, lenders required at least 30% equity in your current home. This rule was established to stop “buying and bailing,” where some borrowers would purchase new homes and then walk away from their underwater mortgages. As of 2015, there are no equity requirements for renting out a primary residence and buying a new property, but your lender will need a copy of your tenant’s rental agreement and proof of their security deposit.

4. Consider foreclosure alternatives

Walking away can seem like the only alternative if you need or have to sell a property, but can’t due to an underwater mortgage. A foreclosure, however, isn’t the only way to deal with an upside down loan. Talk with your lender and discuss your options. You may qualify for a short sale which lets you sell the property for less than you owe, or the bank may agree to a deed-in-lieu of foreclosure. You give the bank the deed to the property, and the bank cancels the debt. Both options will damage your credit score, but the effects aren’t as damaging as a foreclosure.