How to Handle an Underwater Mortgage

Jan 14, 2023 By Susan Kelly

When the outstanding amount of mortgage debt is more than the current value of the house, a situation known as an "underwater" or "upside-down" mortgage exists. When the amount owed on a mortgage outweighs the worth of the house, a situation known as "underwater" exists. The mortgage analytics firm Black Knight said on December 5 that some 272,000 Americans who took out a mortgage to purchase a house in 2022 are currently at least partially underwater on their loans. Negative equity levels remain significantly below historical norms, despite the fact that this may seem ominous.

Having a mortgage that is underwater might be stressful, but it is not always a reason for alarm. During a housing market slump, for example, a homeowner may find themselves underwater on their mortgage if the value of their house lowers. But if you have not been keeping up with your payments & the interest accrued on your mortgage has grown to be too much of a financial strain, you might have to adopt more drastic measures. Your underwater mortgage decision relies on the loan size & your financial situation. A few options are presented for homeowners who find themselves with an underwater mortgage 2022.


Forbearance allows borrowers to temporarily suspend or reduce their mortgage payment amount. This can be a smart choice if you're having temporary financial difficulties like a temporary lack of income. You & the lender shall negotiate the details of your forbearance, especially how you will make up any payments you skipped during the grace period. Check if the lender's repayment terms satisfy your needs. Ensure you can comfortably afford a larger monthly payment if it briefly increases to make up for missing payments.

Loan Modification

Modifying a loan means that the lender alters the terms of the loan in a way that is not reversible. By extending the repayment period or lowering the interest rate, for instance, you may be able to reduce your monthly bill. In rare situations, the lender may be prepared to reduce your main debt, albeit you may be required to pay taxes on the sum pardoned. Moreover, you may keep your home with a loan modification instead of losing it through foreclosure.

Short Sale

As the name implies, a short sale occurs when the buyer is unable to pay off the mortgage in full, and the seller agrees to take less than the balance outstanding. The lender could agree to take less money to settle the debt or perhaps write off the negative equity completely. Short sales are cheaper for lenders and beneficial for homeowners' credit. It's an effective strategy while you are on an underwater mortgage.


The lender may decide to foreclose on your house if none of these solutions works. As a result, you risk losing your property and seeing a large decrease in your credit score. As many as seven years might pass before you're eligible for a mortgage again. Keep your lender informed if you're having trouble paying your mortgage. Due to the financial burden it might cause, many lenders want to prevent foreclosure by any means possible. If you think you might be late on a mortgage payment, you should tell your lender right away. Underwater mortgages raise the likelihood of foreclosure, but it's not guaranteed. You may be able to weather any short-term market downturns, provided you can maintain your repayment schedule and communicate any difficulties to your lender in a timely manner.

Why Do Underwater Mortgages Pose A Problem?

Even if you're current on your mortgage payments, you might still lose your property if the value drops below the loan. This is not always an issue, though. In most cases, this only becomes a problem when the homeowner wants to relocate, sell, or refinance their property. Negative equity, which occurs when you owe more on your property than it is now worth, may make it difficult to make any significant choices involving your mortgage. The good news is that the percentage of submerged properties has been declining over the last several years.

What Is The Most Effective Strategy To Get Out Of An Underwater Mortgage?

In all candour, keeping your present mortgage and making payments toward its principal is usually the best option. Keeping up with your mortgage payments allows you to both increase your equity and protect against a drop in the value of your property. With any luck, you'll be able to pay down your mortgage principal and build some real equity. Housing costs tend to rise with time. You can see this pattern all around the country. The goal is to eliminate all debt by making regular payments until the value of the property increases enough to make a difference. Hope you know how to deal with a mortgage underwater.

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