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LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

Underwater Mortgage: 5 Options for Relief

Updated on:
Content was accurate at the time of publication.

When a home’s value is less than the mortgage balance owed, it’s considered “underwater.” There can be many long term risks to carrying this type of financing, including the possibility of facing foreclosure. Here’s a look at what you should know about underwater mortgages, including how they happen and how you can get your loan back on track.

Underwater mortgages occur when you owe more money on your mortgage loan‘s principal balance than your home is worth in the current market. This is also known as being upside-down on your home loan.

Signs your mortgage is underwater

  • You notice property values are dropping in your area: Falling property values are often the first sign of an underwater mortgage. If you see nearby homes selling for significantly less than your original purchase price, you may be at risk.
  • 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. It is the most accurate way 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 good 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 your total loan balance is higher than when you first borrowed your mortgage, you’re upside-down. Ask your lender about your options to get back on track after mortgage default.

There are two main ways that your mortgage can become underwater: through falling property values or missed mortgage payments.

Falling property values

If real estate values in your area have fallen since you first took out your home loan, you can become underwater on your mortgage.

Example

Let’s say that local property values have recently been declining and your home is currently worth $250,000. However, you bought the home when property values were higher, so you owe $275,000 on your mortgage today. In that case, your mortgage would be underwater and you would have $25,000 of negative equity in your home.

Missed mortgage payments

You can also become upside down on your mortgage if you miss payments.

Mortgages are amortized loans, which means that, when you first take out your home loan, you’ll pay more toward interest charges than the principal balance. If you keep up with your monthly mortgage payments, this will shift over time and you’ll pay more toward your principal balance than you owe in interest.

However, if you miss a payment, the interest will still accumulate and you’ll pay more to catch up and get to the balance you should have. If you can’t pay more, you could risk becoming underwater on your loan.

 Read more about understanding principle and interest monthly payments.

Example

Let’s say you borrowed $150,000 at a 5% interest rate over a 30-year term. With those figures, your total monthly payment would be $805.23 and the first payment would be broken down into $625 worth of interest charges and $180.23 toward your principal balance. If you miss that payment, your total outstanding loan balance would grow to $150,625 during the following month.

Try using a monthly payment calculator to estimate your mortgage payments in different scenarios:

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Not having enough home equity at your disposal can cause many problems in homeownership, including:

  • Trouble getting new financing
  • Difficulty refinancing or selling your house
  • Potential for foreclosure

Trouble obtaining 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, or the measure of how much you owe on your home versus how much it’s worth.

The vast majority of 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.

Learn more about home equity loan requirements.

Difficulty refinancing or selling your home

You may face similar difficulties if you try to take steps 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.

Use our refinance calculator to estimate when you may be able to refinance your home loan.

Potential for foreclosure

Underwater mortgages are at a greater risk of foreclosure, especially when the negative equity is a result of missed payments. Foreclosure occurs when you miss too many mortgage payments and go into default. There’s a clause in your loan agreement that allows the lender to repossess your home and sell it to recoup their investment if you stop making payments.

 Learn more about refinancing a mortgage with late payments.

Utilizing debt restructuring options

Lenders will sometimes offer debt restructuring options to borrowers who are experiencing financial hardship. These options can include temporary payment deferral or 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.

Undergoing a 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 is willing to accept you selling the home for less than what you owe on the mortgage.

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.

Filing for bankruptcy

When your lender won’t agree to a short sale, filing for bankruptcy may be another last-resort option. Chapter 7 bankruptcy allows you to liquidate your assets to dissolve your 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 negative impact on your credit score. Chapter 13 bankruptcy stays on your credit report for seven years; Chapter 7 will affect your score for 10 years. This impact can make it extremely hard to get another mortgage after bankruptcy or be approved for another type of financing in the future.

Get your free credit score with LendingTree Spring.

Freddie Mac Enhanced Relief Refinance® program

As of the time of writing, Freddie Mac has paused this program until further notice.

The Freddie Mac Enhanced Relief Refinance program helps borrowers with LTV ratios too high to qualify for a traditional refinance program. It can make your monthly payments more affordable by reducing your mortgage interest rate and potentially shrinking your principal balance.

To qualify for the program:

  • Freddie Mac must own your home loan
  • Your mortgage application date must be on or after Nov. 1, 2018
  • You must be current on your mortgage payments and not delinquent more than once in the last 12 months
  • Your mortgage must be seasoned for at least 15 months

Fannie Mae high LTV refinance program

As of the time of writing, Fannie Mae has paused this program until further notice.

Fannie Mae and Freddie Mac provide similar refinance programs. Fannie Mae’s version is known as the high LTV refinance program. It’s similar to Freddie Mac’s offering in that it allows you to refinance your home loan, even if your LTV ratio exceeds the typical requirements.

Borrowers also have to meet certain eligibility criteria, including:

  • Fannie Mae must own your home loan
  • Your mortgage application date must be on or after Oct. 1, 2017
  • You must be current on your mortgage payments and have not had more than one 30-day delinquency in the last 12 months
  • Your mortgage must be seasoned for at least 15 months

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