What's an Underwater Mortgage?

An “underwater” mortgage is when the loan balance is higher than the property's fair market value.

By , Attorney · University of Denver Sturm College of Law

An "underwater" mortgage is when the loan balance exceeds the property's fair market value. This situation was common following the housing market crash and during the foreclosure crisis when many homeowners saw their homes lose a considerable portion of their value.

During the COVID-19 pandemic, home prices rapidly increased, and mortgage rates were at an almost record low. Competition for available homes was so fierce that buyers often waived home inspections and appraisals or paid more than the home's asking price.

However, rising inflation and high interest rates are dampening consumer demand, and home prices are falling. So, an alarming number of new homeowners are finding out that they're underwater on their mortgage loans.

What Is an Example of an Underwater Mortgage?

Say you owe $600,000 on your mortgage loan, but the market value of your home is only $575,000. Your mortgage debt is $25,000 more than your home's value. In this case, your mortgage is underwater.

How to Determine If You're Underwater on Your Mortgage Loan

Here are the steps to determine whether you owe more than your home is worth.

Step 1

First, figure out how much you owe on your mortgage loan (or loans).

How to find out what you owe. To find out approximately what you owe, get a copy of your most recent mortgage statement or go online and look for the unpaid principal balance. The unpaid principal balance includes only the amount of the loan that's unpaid.

It doesn't include interest or outstanding charges, like late fees or foreclosure-related charges, that you owe now or would owe in the future. For a statement of exactly how much you would need to pay off the loan, you can request a payoff statement from your mortgage servicer, which will include the unpaid principal balance plus interest and fees.

How to request a payoff statement from your servicer. You can request a payoff statement by calling your servicer or, in some cases, by making your request online. The payoff statement will include precisely how much you must pay by a specified date to satisfy the debt. It will include any interest you owe through a specific date and any other fees you've incurred and not paid.

Don't forget to include your other mortgages in the total when determining whether you're underwater. If you have a second mortgage on your home, be sure to find out how much you owe on that mortgage as well. Then, add the total amount you owe on the second mortgage to the first mortgage amount.

For example, if you owe $500,000 on your first mortgage and $10,000 on the second, add the figures together, and your total mortgage debt is $510,000.

Step 2

Next, determine the current market value of your home. To do this, you can:

  • hire an appraiser (although an appraisal might be expensive)
  • speak to one or more local real estate agents to find out what they think your home is worth, or
  • look online to review the sale prices of comparable houses that recently sold in your neighborhood to come up with an estimated value of your home.

Where to find out the sale prices of nearby, similar homes. You can find the sale prices for similar homes in your area at www.zillow.com. Run a search for your area and select the "Recently Sold" option to view sale prices. Look for homes that recently sold in your neighborhood and are similar to yours in terms of square footage, number of bedrooms and bathrooms, and features to figure out the approximate value of your home.

Zillow will also give you an estimate, called a "Zestimate," of what it thinks the current market value of your home is based on the data it has in its system gathered from public records and information entered by users. Be aware, however, that this number could be way off. Zillow uses an automated system and can't account for variations such as special features, location, maintenance needs, and market conditions.

Step 3

Take your home's current market value and subtract your total mortgage debt. If you get a negative result, your mortgage is considered underwater.

For instance, say your total mortgage debt is $510,000. Based on your research and after speaking to several real estate agents, you determine the likely market value of your home is $475,000. Take $475,000 and subtract $510,000. You get a negative $35,000. So, you're underwater by $35,000.

Problems That Underwater Mortgages Cause (Can I Get Out of an Underwater Mortgage?)

Underwater mortgages can pose issues in several situations.

Difficulties in Selling Your Home

An underwater mortgage makes it difficult for homeowners to sell their house. Buyers generally will only pay market value for a home. But if a property is underwater, the sale price won't be enough to pay off the mortgage debt. This situation makes it difficult, if not impossible, to sell an underwater property.

You might be able to get out of an underwater mortgage if the lender agrees to a short sale. But you could get stuck with a deficiency judgment.

Not Able to Refinance

An underwater mortgage also often prevents a homeowner from being able to refinance the debt. Underwater homeowners typically can't get a new loan with more favorable terms, like a lower interest rate, if the property's current value isn't enough to secure a new loan sufficient to pay off the existing mortgage.

However, Fannie Mae and Freddie Mac sometimes offer refinancing options even if you're underwater. In the past, Fannie Mae offered the High Loan-to-Value Refinance Option, and Freddie Mac offered an Enhanced Relief Refinance. To find out if you have a Fannie Mae or Freddie Mac loan, use the look-up tools at www.fanniemae.com/loanlookup and www.freddiemac.com/mymortgage.

Higher Risk of Foreclosure

If a homeowner needs to sell the home or refinance because the monthly payments are too high but can't do so, there's a high risk that the home will go into foreclosure.

To learn more about how foreclosure works in your state, see Nolo's Key Aspects of State Foreclosure Law: 50-State Chart or check out your state's page in our State Foreclosure Laws area.

Getting Help

If you're facing a foreclosure and need more information about how the process works where you live or want advice about what to do in your particular situation, consider contacting a foreclosure lawyer.

To learn about different ways to avoid a foreclosure, like with a loan modification, short sale, or deed in lieu of foreclosure, consider talking to a HUD-approved housing counselor.

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