Underwater Mortgage: 5 Options for Relief
If your home’s value is less than the amount you owe on your home loan, you have an underwater mortgage.
This is also known as being upside-down on your home loan or having negative equity.
- An underwater mortgage occurs when your mortgage loan’s principal balance is higher than your home’s current market value.
- Underwater mortgages are typically caused by falling property values or missed mortgage payments.
- Refinancing an underwater mortgage can be challenging, but it’s not impossible.
If you’re one of the millions of U.S. homeowners who are underwater on their mortgage, we’ll cover steps you can take to minimize the impact of an underwater mortgage and how to refinance to get back above water.
What is an underwater mortgage?
When a home’s value is less than the remaining mortgage balance, it’s considered “underwater,” meaning you’re submerged in debt. This is also known as being upside-down on your mortgage or having negative equity. Regardless of what it’s called, it’s not a good financial position to be in.
How do you know if your mortgage is starting to sink? Here are some telltale signs:
- Property values are dropping in your area: Falling property values are often an early warning sign that a mortgage could become underwater.
- Your home’s appraised value is low: A home appraisal compares your home’s condition and features to other homes in the area that have recently sold. An appraisal is one of the most accurate ways to determine your home’s fair market value. If your appraised value comes back lower than your loan balance, your mortgage is underwater.
- You’re behind on your mortgage payments: If you’re behind on payments, there’s a chance your mortgage may be underwater. Contact your lender and ask for a payoff statement to get a sense of how much you currently owe. If missed payments, fees and accrued interest push what you owe above your home’s value, your mortgage is underwater. Ask your lender about your options to get back on track to avoid a mortgage default.
According to ATTOM, a real estate data company, 3% of mortgages in the U.S. were considered seriously underwater (where the combined estimated loan balances exceeded estimated market values by at least 25%) as of Q4 2025.
While that still means millions of Americans have underwater mortgages, the percentage of people with underwater mortgages has dropped significantly in recent years following a spike after the 2008 financial crisis. In the aftermath of the 2008 housing crisis, roughly one-quarter of mortgaged homes were underwater.
Financial repercussions of an underwater mortgage
Limited home equity can create significant financial challenges, including:
Trouble getting new financing
If you want to take out a home equity loan or home equity line of credit (HELOC), your lender will review your loan-to-value (LTV) ratio, which is the measure of how much you owe on your home versus how much it’s worth.
Lenders set limits for how low your LTV ratio must be for them to approve you for these types of financing. If your mortgage is underwater, you’ll likely be denied.
Difficulty refinancing or selling your house
You may face similar difficulties if you want to refinance your mortgage or sell your home.
Most lenders require you to have some equity built up in your home before they’ll allow you to refinance.
When selling, you usually use the funds from the sale to pay off your mortgage balance. If you can’t make enough from a sale to pay off your home loan, you’ll either need to stay in your home and pay down a larger chunk of your mortgage balance or tap your savings to cover the difference.
Potential for foreclosure
Underwater mortgages are at higher risk of foreclosure, especially when negative equity results from missed payments.
Foreclosure occurs when you miss too many mortgage payments and go into default. Most mortgage agreements allow the lender to begin foreclosure proceedings if you stop making payments for an extended period of time.
How does an underwater mortgage happen?
There are two primary ways mortgages go underwater: through falling property values or missed mortgage payments.
Falling property values
If real estate values in your area have fallen since you took out your home loan, you can become underwater on your mortgage.
Say you took out a mortgage for $500,000 when property values were high.
Since your purchase, property values have fallen, and your home is only worth $420,000. In this case, your mortgage is considered underwater because your loan is $80,000 more than your home’s value.
Missed mortgage payments
Mortgages are amortized loans, meaning that early on, a larger share of each payment goes toward interest rather than the principal balance. If you keep up with your monthly mortgage payments, the balance shifts over time, and more of each payment is applied to reducing the loan itself.
If you miss a payment, however, interest still accumulates, increasing what you owe. If you fall too far behind and can’t catch up, your loan balance could grow to exceed your home’s value, putting the mortgage underwater.
Let’s say you have a $500,000 mortgage at a 5% interest rate with a 30-year term.
Your total monthly payment would be $2,684.11. Of that first payment, $2,083.33 would go toward interest, while just $600.77 would reduce your principal balance.
If you missed your payment, the unpaid interest would be added to your loan, increasing it to $500,600.77 the following month.
Read more about understanding principal and interest monthly payments.
Can you refinance an underwater mortgage?
It is possible to refinance an underwater mortgage.
Because homeowners with an underwater mortgage owe more than the property is worth, most lenders won’t allow you to refinance even if you meet the application requirements. But it’s not impossible.
When evaluating a refinance application, lenders typically look at several key factors, including:
- Income and assets
- Credit score
- Other debts
- The LTV ratio (how much you owe compared to your home’s current value)
Eligibility for an underwater mortgage refinance often depends on the type of loan you have.
For example, underwater FHA borrowers who are current on their payments may qualify for an FHA streamline refinance. This option typically requires less documentation and underwriting than traditional refinances.
An FHA streamline refinance must produce a net tangible benefit, which means the refinance must clearly improve your financial position. That could include reducing your interest rate or monthly payment, shortening your loan term or eliminating monthly mortgage insurance.
We discuss other types of loans that can be refinanced while underwater in the next section.
3 loan options for refinancing an underwater mortgage
| Refinance Option | Best for |
|---|---|
| FHA Streamline Refinance | Homeowners with an FHA-backed mortgage |
| VA Interest Rate Reduction Refinance Loan (IRRRL) | Homeowners with a VA-backed mortgage |
| USDA Streamlined/Streamlined-Assist Refinance | Homeowners with a USDA-backed mortgage |
| Fannie Mae High LTV Refinance Option | Currently suspended |
| Freddie Mac Enhanced Relief Refinance (FMERR) | Currently suspended |
Option 1: FHA streamline refinance
You may be able to refinance your underwater FHA mortgage with less credit documentation and underwriting than traditional FHA refinances.
Requirements include:
- Must already have an FHA loan
- Payments must be up-to-date
- The refinance results in a net tangible benefit to the borrower
- No more than $500 in cash can be taken out at closing
Option 2: VA IRRRL (streamline refinance)
A VA interest rate reduction refinance loan (IRRRL) may allow you to refinance an underwater mortgage backed by the U.S. Department of Veterans Affairs (VA). The VA doesn’t set LTV limits.
Requirements include:
- You are refinancing a VA-backed home loan
- You live in or used to live in the home covered by the loan
Option 3: USDA streamline refinance
A streamlined or streamlined-assist refinance backed by the United States Department of Agriculture (USDA) may allow you to refinance an underwater mortgage on your rural property. Both options have less stringent documentation and underwriting requirements than a traditional USDA refinance, with streamlined-assist refinances having the simplest qualification process.
Requirements for streamlined-assist refinances include:
- A net tangible benefit, including at least a $50 reduction of your total principal, interest and monthly payment
- Have no loan payment defaults in the past 180 days
- Meet USDA household income eligibility requirements
- Occupy the property being refinanced
Suspended Program Options
Fannie Mae High LTV Refinance
Fannie Mae’s High LTV Refinance program was created after the 2008 housing crisis to help underwater homeowners refinance. However, the program is currently suspended.
Freddie Mac Enhanced Relief Refinance (FMERR)
Freddie Mac’s Enhanced Relief Refinance program was also created after the 2008 housing crisis to help underwater homeowners refinance. It too is currently suspended.
What if you can’t refinance your underwater mortgage?
If you can’t refinance your underwater mortgage, there are some options that may help.
Wait and keep making payments
If you can’t refinance but can still afford to make monthly payments, continue to make payments and wait for the market to rebound. You’ll be chipping away at your loan balance and building back equity with every on-time payment.
If you can still afford the monthly payments and don’t have to move for a while.
Debt restructuring
Lenders sometimes offer debt restructuring options to borrowers who are experiencing financial hardship. These options can include temporary payment deferral or a loan modification, which would allow you to change the terms of your existing loan and make your payments more affordable.
Contact your lender to see what options may be available to you.
When you’re struggling to make payments but want and need to remain in the property.
Short sale
If you feel like you’re unable to get back on track with your mortgage payments, consider selling your home through a short sale. A short sale agreement means your lender agrees to let you sell the home for less than the remaining mortgage balance.
There are more hoops to jump through when participating in a short sale. For instance, you’ll have to get the lender’s approval before you accept any offers. But it can be used as a last-resort alternative to foreclosure.
When you’re unable to make monthly payments and want to avoid foreclosure.
Bankruptcy
When your lender won’t agree to a short sale, filing for bankruptcy may be another last-resort option. Chapter 7 bankruptcy involves liquidating certain assets to dissolve eligible debts, while Chapter 13 bankruptcy allows you to keep your assets and pay off your debts through a court-approved payment plan.
Keep in mind that filing for bankruptcy will have a severe impact on your credit score. Chapter 13 bankruptcy stays on your credit report for seven years; Chapter 7 remains on your credit report for 10 years. This impact can make it extremely hard to get another mortgage after bankruptcy or be approved for other types of financing in the future.
When you can’t afford the monthly payments and can move out of the property.
Deed-in-lieu
If you want to avoid foreclosure, you may consider a deed-in-lieu. This option involves voluntarily turning your property over to the lender. You must do this before the foreclosure process begins. In some states, you may still be responsible for the difference between the value of your property and the amount you still owe, but you can ask the lender to waive it.
When you can’t afford the monthly payments, and can move somewhere else.
Pros and cons of an underwater mortgage refinance
Pros
- Interest savings: If you secure a lower interest rate, you could reduce the monthly payment and total interest paid over the life of the loan.
- Quicker payoff: With better terms, you may be able to pay off your loan sooner.
Cons
- Limited availability: While there were numerous programs for underwater borrowers following the financial crisis of 2008, several have since been paused or eliminated.
- Challenging qualifications: Most lenders require you to have built a certain amount of equity in your home in order to refinance.
- Closing costs: Refinancing comes with costs, which typically range from 3% to 6% of your loan principal.
How to refinance an underwater mortgage
1. Stay focused on your financial goal
When refinancing an underwater mortgage, your number one priority is to get that loan back above water. Be clear about what you’re hoping to accomplish when discussing refinance options with lenders to ensure it helps you meet your goals.
2. Evaluate your options
If your loan is backed by a U.S. government agency, you may be eligible for certain options. If you’re unsure who owns your mortgage, you can ask your servicer, whose number should be on your monthly mortgage statements.
Fannie Mae and Freddie Mac both offer online loan-search options:
3. Shop around
Ideally, get three to five quotes from various lenders. When your mortgage is underwater, you may have fewer options, so comparison shopping becomes all the more important.
You can use LendingTree to compare rates from a network of vetted refinance lenders. Borrowers that go through LendingTree for rate quotes on 30-year fixed rate mortgages save an average of over $60,000 over the life of their loan.