Underwater on Your Mortgage? Your Options

The short version

Being underwater (also called having negative equity or being upside down) means you owe more on your mortgage than your home is worth today.

It sounds alarming, but on its own it isn’t an emergency. It mainly matters in two moments: when you sell, and when you try to refinance or borrow against your home. If you can afford your payment and plan to stay, the most common answer is to keep paying while your balance shrinks and, ideally, prices recover.

The options get harder if you need to sell or can’t keep up with payments. This guide walks through each one, from least to most damaging.

First, check where you actually stand with the home equity calculator. It shows your equity both on paper and after selling costs, which is the number that matters if you sell.

Option 1: Stay and keep paying

If your payment is affordable and you don’t need to move, staying put is usually the best choice. Every payment reduces your balance, and home values can recover over time.

Ways to rebuild equity faster:

• Pay extra toward principal. Even small extra payments shrink your balance faster. Tell your servicer (the company you make payments to) to apply the extra to principal.
• Recast after a lump sum. If you receive a bonus or inheritance, putting it toward your balance and asking for a recast lowers your monthly payment too.
• Lower your other costs. Shopping your insurance and appealing your property taxes won’t change your equity, but it makes staying more affordable. See how to lower your mortgage payment without refinancing.

Option 2: Refinance, if your loan type allows it

Most refinances require equity, so being underwater usually rules them out. Two exceptions:

• Federal Housing Administration (FHA) loans can use an FHA Streamline Refinance, which can be done without an appraisal.
• Department of Veterans Affairs (VA) loans can use an Interest Rate Reduction Refinance Loan (IRRRL), which usually doesn’t require one either.

These only help if today’s rates are lower than your current rate. Programs for underwater conventional loans have come and gone over the years; ask your servicer whether any are available now.

In Texas, borrowing against your home, including a cash-out refinance, generally can’t take your total loans above 80% of its value. See Texas home equity rules.

Option 3: Rent the home out

If you need to move but don’t want to sell at a loss, renting the home can cover some or all of your payment while you wait for prices to recover.

Before you do, check three things: whether the rent will cover your mortgage, taxes, insurance, and repairs; whether your loan or homeowners association allows renting; and whether you’re ready to be a landlord. You’ll also need a landlord insurance policy instead of a standard homeowners policy.

Option 4: Ask for help if you’re struggling to pay

If a job loss, illness, divorce, or other hardship makes your payment unaffordable, contact your servicer before you miss a payment. Options may include:

• Forbearance: a temporary pause or reduction in payments. The missed amount still has to be repaid later, so ask exactly how.
• Loan modification: a permanent change to your loan terms, such as a longer term or lower rate, to make the payment affordable.

A housing counselor approved by the U.S. Department of Housing and Urban Development (HUD) can help you understand your options and talk to your servicer, for free.

Option 5: Short sale

In a short sale, your lender agrees to let you sell the home for less than you owe and accepts the sale proceeds as payment. The lender must approve the sale, which can take months.

Two things to get in writing before you agree:

• Whether the lender waives the rest of the debt. In many states, a lender can pursue you for the remaining balance (called a deficiency) unless it agrees in writing not to. State laws differ.
• How it will be reported. A short sale damages your credit, though usually less than a foreclosure.

Option 6: Deed in lieu of foreclosure

With a deed in lieu of foreclosure, you hand the home’s ownership to the lender in exchange for releasing you from the mortgage. It’s usually faster and less public than foreclosure. As with a short sale, get in writing whether the lender waives any remaining balance.

Option 7: Foreclosure

Foreclosure is what happens when payments stop and the lender takes the home through a legal process. It does the most damage to your credit, and it typically means the longest wait before you can get a new mortgage. In some states, the lender can also pursue you for any remaining balance.

If foreclosure is likely, talk to a HUD-approved housing counselor or a real estate attorney before it happens. Earlier is better: options like a short sale or deed in lieu usually require working with your lender before the foreclosure is complete.

A tax warning on forgiven debt

If a lender forgives part of what you owe, through a short sale, deed in lieu, or modification, the forgiven amount can count as taxable income. A federal exclusion for forgiven debt on a main home covered debt forgiven before January 1, 2026; under the IRS’s current guidance (Publication 4681), it doesn’t apply to debt forgiven, or forgiveness agreements made, after December 31, 2025. Other exclusions, such as being insolvent (owing more than everything you own is worth), may still apply, so talk to a tax professional before you agree to any deal.

Mistakes that make things worse

• Paying a company to “save your home.” Foreclosure rescue scams charge upfront fees and deliver nothing. Help from your servicer and HUD-approved counselors is free.
• Stopping payments to force a deal. Missed payments add late fees and credit damage and can start the foreclosure process.
• Walking away without advice. Leaving the home doesn’t end your obligation to pay, and the consequences depend on your state and your loan.
• Ignoring letters from your servicer. Deadlines in those letters can close off options.

Frequently asked questions

How do I know if I’m underwater?

Compare what you owe, including any home equity line and any unpaid special assessment, with what your home would sell for today. (Florida condo owners facing a large assessment: see Florida condo special assessments.) Use recent sales of similar homes nearby, not just one online estimate, and remember that selling costs often run 5% to 8% of the price. The home equity calculator does the math, including a scenario where your home is worth 10% less.

Can I sell my house if I’m underwater?

Yes, but you’ll need to cover the difference between the sale price and what you owe, either with your own cash or through a short sale approved by your lender.

Will being underwater hurt my credit?

No. Being underwater on its own doesn’t affect your credit. Missed payments, a short sale, a deed in lieu, or a foreclosure do.

Should I stop paying my mortgage if I’m underwater?

No. Stopping payments adds fees, damages your credit, and can lead to foreclosure. If you can’t afford the payment, contact your servicer and a HUD-approved housing counselor first.

Information here is general guidance, not legal, tax, or financial advice. Foreclosure, deficiency, and tax rules vary by state and by situation. Talk to a HUD-approved housing counselor, a real estate attorney, or a tax professional about your specific circumstances.