When a homeowner falls behind on their mortgage payments or finds themselves in a tough financial spot, refinancing can feel like the best way out. But what happens if you owe more on your home loan than your house is worth? This situation is known as an underwater mortgage, and it’s more common than many people realize.
Being underwater on your mortgage means that your mortgage balance is greater than the property value of your home. This can make it difficult to sell, refi, or tap into your home’s equity. Still, even in tough circumstances, there are programs and options available that can help you find new financing and possibly keep your home.
An underwater mortgage can happen for several reasons. Most often, it’s the result of a drop in home values. That's something that can occur due to broader changes in the real estate market, job losses in your area, or economic downturns. If your home loses value but your mortgage payments stay the same, you could end up owing more than the house is worth.
Homeowners might also face this situation if they buy a home with a low down payment and the market dips soon after their purchase. This is especially true for those using FHA loans or other forms of low-down-payment financing. While these programs help people become homeowners, they can increase the chances of having little or no equity if market conditions shift.
Under normal conditions, refinancing a mortgage involves replacing your existing mortgage with a new loan that has better terms, like a lower interest rate, smaller monthly payments, or a longer repayment period. But lenders typically require that the home appraisal shows the house is worth at least as much as the new loan.
When your house is underwater, it doesn’t appraise for the amount you owe. This makes it difficult for banks to approve a refi using traditional methods. Lenders see these loans as risky and may require additional qualifications or may reject the application outright.
There’s some good news, though: If you’re struggling with an underwater mortgage, government-backed options may be available. For example, Fannie Mae and Freddie Mac have historically supported homeowners through programs designed to help them refinance even when they have little or no equity. These include:
You can also talk to a HUD-approved housing counselor to learn more about which programs are currently available. Credit.org offers free assistance through our nonprofit counseling services.
If you’re unable to qualify for a refinance or keep up with your payments, a short sale might be the next best option. A short sale occurs when your lender agrees to let you sell your home for less than you owe on the mortgage. The remaining debt may be forgiven or repaid in part depending on your agreement with the lender.
A short sale can have a credit impact, but it’s generally less damaging than foreclosure or bankruptcy. It allows you to move on from an unaffordable home while limiting long-term harm to your credit report.
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If you’re ineligible for traditional refinancing but not yet behind on your payments, an FHA loan option like the FHA Streamline Refinance may be helpful. This program is designed for homeowners with existing FHA loans and allows a refi with less paperwork, no new appraisal in some cases, and more lenient credit requirements. It’s a great way to improve loan terms without needing to show that your home has gained value.
However, this option only works for people with current FHA-insured loans and may not be available for other types of mortgages. Always verify your loan type and talk to your lender about your eligibility.
For broader help, talk to a HUD-approved housing counselor. Credit.org offers certified, nonprofit housing counseling services to help homeowners understand their options and plan a path forward. Learn more from our article Simplify Refinancing with FHA Streamline Options Today.
Before making any decisions, it’s important to understand your mortgage balance and your home’s current market value. These figures are crucial for determining whether you’re underwater and by how much.
Your balance is easy to find; just check your latest mortgage statement.
For your home’s value, you’ll likely need a home appraisal, which will compare your property to recent sales in the area. If you’re unsure where to start, online valuation tools can offer a rough estimate, but a professional appraiser or real estate agent can provide a more accurate number.
Keep in mind, property values can shift due to local demand, school zones, and neighborhood development. What you paid a few years ago might no longer reflect the current value of your home.
Some homeowners choose to stay in their homes and work toward building equity again. Even if refinancing isn’t an option today, making consistent payments, avoiding missed dues, and maintaining your home can slowly improve your situation.
You can build equity by:
Saving an underwater mortgage with this approach takes patience, but it can prevent the consequences of a short sale or foreclosure and put you back in a better financial position.
While it may be tempting to look for creative new financing or alternative loan products, proceed with caution. Some offers may come from predatory lenders or include high interest rates, balloon payments, or hidden fees. Always work with a trusted professional and seek out nonprofit housing counselors to review any paperwork before you sign.
Watch for red flags like:
For more advice, visit the Consumer Financial Protection Bureau (CFPB) or check out USA.gov’s housing resources.
If you’re currently dealing with an underwater mortgage, don’t wait until you’re facing missed payments or foreclosure. The earlier you act, the more options you have. Whether it’s a government program, an FHA loan refinance, or just a plan to build equity over time, there’s a path forward.
Reach out to a nonprofit agency like Credit.org for free help. We’re here to explain your options, connect you with resources, and help you avoid high-risk financial decisions. We'll help you explore your options and give you personalized advice for your unique situation.
If you want to learn more about budgeting or how to reach your financial goals, get started with our free, confidential counseling and education right here at Credit.org.
