What Do You Do if You’re Underwater on Your Mortgage?

If you’re behind on your mortgage payments, you probably aren’t sleeping very well at night. And the sooner you address the issue, the faster you can return to some sense of normalcy. The question is, what do you do?

The Problem With Being Underwater on Your Mortgage 

An “underwater” or “upside down” mortgage occurs when the remaining principal balance surpasses the fair market value of the property. For example, if you have $200,000 in principal remaining on your mortgage, but the property is worth just $150,000, you would be underwater by $50,000.

While less common than it was during the 2008 financial crisis and subsequent housing crash, underwater mortgages do still exist. They can happen for a variety of reasons, but typically occur when a buyer overpays for a property, there’s a sudden plunge in home values, and/or a homeowner repeatedly takes out equity.

Underwater mortgages are especially likely to occur in a low- or no-money down situation. If you’re putting three percent or less down on a property, all it takes is a small movement in the value of the property for you to teeter on the edge.

Technically speaking, there’s nothing wrong with being underwater – if you plan to stay in the home for many years. But it’s not a situation you want to find yourself in. Should you have to sell in the near future, you could find yourself owing the bank money at the closing table. 

4 Tips for Dealing With an Underwater Mortgage 

While underwater mortgages aren’t overwhelmingly common at the moment, all it takes is a small downturn in the economy and that could change. And if you ever find yourself in one of these scenarios, here are some tips you can use to stay afloat and ultimately find higher ground: 

1. Principal Reduction 

Nobody likes a foreclosure. It’s a devastating black mark on a homeowner’s financial record, and it’s expensive for the bank. So to avoid these no-win situations, some banks will offer principal reduction programs. (The key word here is “some.” Most banks today won’t offer these programs, but it doesn’t hurt to ask.)

As Investopedia explains, “A principal reduction is a decrease in the amount owed on a loan, typically a mortgage. A lender may grant a principal reduction to provide financial relief for a borrower as an alternative to foreclosure on the property.”

While many of the principal reduction programs initiated during the 2008 housing collapse have since expired, there are a few still around. The Making Home Affordable Program continues to provide assistance for distressed mortgage loans. If you qualify, it could be a great option. 

2. Modify the Loan 

Not planning on selling your home anytime soon, but want to bring things back into equilibrium and enjoy a lower monthly payment? If you’re employed, but your mortgage payment makes up more than one-third of your gross monthly income, you might be able to modify your loan. Speak with your lender about options. 

3. Sell to a Cash Buyer 

When all else fails, selling your house could be the best way forward. It allows you to get rid of the property, bury the headaches, and level your finances. Unfortunately, you probably can’t go the traditional sales route. (You’ll have to write the bank a pretty big check.) But there are other options.

When you’re upside down and have lots of repairs that you can’t pay for, selling to a cash buyer could be the easiest path forward. It’s fast, streamlined, and eliminates all of those pesky fees that further exacerbate your situation. 

4. Short Sale 

If foreclosure is imminent, you might be able to convince the bank to let you short sale the property for less than market value. In this case, you retain ownership, and the bank agrees to a sale price. They take the proceeds and then write off the underwater portion. You walk away without any cash, but you also avoid owing any money. It’s like wiping the slate clean (without a foreclosure on your record). 

Make Smart Decisions 

When you’re underwater on a mortgage, it can feel like you’re drowning. And while panicking might seem to be the only solution, you’re better off taking a few deep breaths and working through your options. There are no guarantees that things will end up how you hope, but there are multiple ways to stay afloat. Research each of the tips highlighted in this article and pursue the one that seems like the best fit.