What Does It Mean If You’re Underwater On Your Mortgage?

Written by Ashley Sutphin Posted On Wednesday, 26 January 2022 00:00

If you’ve heard the term underwater mortgage, it refers to a situation where the balance on a mortgage is more than the home’s fair market value. Being in a situation with an underwater mortgage was common after the housing crash in the late 2000s. Many homeowners rapidly saw their homes lose a significant amount of value.

Real estate has recovered since then, but there are still many parts of the country that have a large share of homes where the owner would be considered underwater on their home loan.

No one wants to owe more on their home than it’s worth, but it’s a more common scenario than you might think.

If you bought your home a couple of years ago and owed $200,000 on your mortgage, that might have been fine. Then, something could have happened, triggering a decline in home values where you live. Now, your home is worth, let’s say, $180,000, but you owe $200,000 regardless.

Your mortgage would be $20,000 more than the value of your home.

An underwater mortgage is also referred to as being upside-down.

Are You Underwater?

If you’re concerned you could be underwater, there are some steps you can take to figure it out. First, determine what you still owe on your mortgage.

Then, you’ll want to find out the value of your home. You can talk to a real estate agent to get a general estimate. You can also get a more specific, accurate value if you hire an appraiser.

From there, you’ll subtract what you owe from the current value.

So what can you do if you find out you are underwater?

Options for an Underwater Mortgage

It can feel scary if you figure out you owe more than what your home is worth, but you aren’t without options.

One of the simplest options is to stay in your home and build equity.

You want to work toward paying it off, even if it’s a slow process.

Once you pay more of your principal, you’ll start to feel like you’re in a better position, and you will be.

If you don’t have to, don’t give up and then default on your payments.

Another option is to refinance. However, you can’t refinance when you owe more than it’s worth. It would help if you had at least 20% equity in your home for most lenders to consider you for refinancing.

If you’re underwater, though, you might qualify for HARP. HARP was created in response to the 2008 housing crisis.

To qualify for HARP, you must have made your mortgage payments on time for the past six months. You can’t have had more than one late payment over the past 12 months. The program only applies if you have a loan that originated before May 31, 2009, with less than 20% equity.

If you’re underwater, the third option is that you could sell your home, and then you’d have to pay the amount you still owe. You’re going to lose money, and you may need cash on hand so that you can make up the difference between what the home is worth and what you owe.

This isn’t a great option, and it should only be a consideration if you absolutely have to sell your house for some reason.

A fourth option is to go through the short sale process. A short sale is when you can’t afford your mortgage payments, and your home is worth less than the current balance of the mortgage. In a short sale, the lender will need to agree to sell your home for less than what’s owed on it. Lenders don’t like this because they lose money, and they’re only going to offer this option as a last resort.

If you want to sell your home in a short sale, you have to show the lender you aren’t able to make your payments, and you won’t be able to catch up on them.

Finally, the fifth option is to foreclose on your home. You’ll be evicted if you still live there. A foreclosure is the absolute last thing you want to do if you’re upside down. It would help if you tried everything else before going this route because you’ll lose your home, and you will usually have to wait seven years to get another mortgage.

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