Have an Underwater Mortgage? These Solutions Can Help You Come Up for Air

If you've found yourself unable to afford your mortgage payments, you're not alone. In the real estate world, many people refer to this as an underwater mortgage. So what does that all-too-common euphemism actually mean, and what are your options?

According to a Cotality 2025 home equity report, nearly 1.2 million U.S. homeowners were underwater on their mortgages by the end of the first quarter of the year. That’s an increase of 17% compared with the first quarter of 2024, and the number of residential properties that fell into negative equity increased by 172,000 homes.

Additionally, the share of mortgaged properties considered seriously underwater rose in 35 states quarter over quarter and in 46 states year over year, according to the latest Home Equity and Underwater report  from real estate data firm ATTOM.

"Rising shares of underwater homes are a warning sign, not a crisis yet, but they signal potential for slower price growth, more distressed sales, and greater risk if local economies weaken further," says Hannah Jones, senior economic research analyst at Realtor.com®.

What is an 'underwater' mortgage?

Simply put, being underwater on your mortgage means the balance of your mortgage loan is greater than the fair market value of your home. This can happen when there's a housing market downturn or an outright crash (as there was in 2008) that causes property values to plummet.

For example, say you bought a home for $250,000. Maybe by now you still owe $200,000 on your loan, but if you tried to sell your home in the current market you might get only $170,000. That would leave you still owing $30,000 on your mortgage with no down payment for your next home. Often, the best thing to do is sit tight and wait it out.

But there are other choices.

Underwater mortgage options

To give it to you straight, a lot of the options for getting out of an underwater mortgage hurt one way or another, even if you have great credit. But get ready to bite the bullet: There are several paths you can take to get back on the road to financial stability.

1. Short sale: You could try a short sale, but that will show up in your credit history, says Elise Leve, a senior mortgage banker with Citizens Bank. "If you wanted to buy another property, most lenders will not provide you a mortgage if you have had a short sale within the last two to four years," she says. "Therefore you would need to wait to buy again until after the waiting period has passed." Clearly, that would defeat the purpose if you're trying to find a new home as soon as possible.
2. Dip into your savings: You could cash out retirement funds or use your other savings to make up the difference, but that could leave you with nothing (or close to nothing) for a down payment on your next home. Still, in that case, Leve suggests finding a loan from the Federal Housing Administration. "Fannie Mae options up to 97% as well as up to 105% financing on some of their community homebuyer programs," she says. She recommends working with an experienced loan officer who can help you compare loan products.
3. Rent out your home: Perhaps the best option is renting out your home while you buy or lease another one that meets your family's needs. "This allows disposing of your current home without tapping retirement funds or damaging your credit," says real estate professional and attorney Bruce Ailion of Re/Max Town & Country in Atlanta. In fact, Supreme Lending loan officer Jason Skinrood of Salt Lake City says, "By renting the underwater home, the homeowner can use the lease income (75%) or income claimed on their Schedule E to offset the mortgage payment on the underwater home when applying for financing on a new larger home. The timing relative to the tax year will determine whether the homeowner can use the lease or Schedule E income."
4. Renovate your home: You could also try renovating your home to expand its size and value. "The good news is that lending guidelines have allowed for the use of lower equity financing," says Peak Finance Company sales manager Tamir Lahav. "There are certain circumstances where a renovation loan can be utilized with as little as 5% equity on a property while utilizing the 'future value' (after renovations) of the home."

Additional edits and information provided by Dina Sartore-Bodo.