Discovering that you owe more on your mortgage than your home is worth can be unsettling, to say the least. It’s especially troubling if you were hoping to sell, refinance, or move soon. If you’re underwater on your mortgage, your best next step typically depends on four factors: In this guide, we’ll explain what it means to have an underwater mortgage, how to calculate your potential shortfall, and the options you may have. We’ll also share insights from an experienced loan officer and a top real estate agent who have worked with homeowners in your situation.
An underwater mortgage means you owe more on your home loan than the property is currently worth. You may also hear this described as having negative equity or being upside down on your mortgage. For example, suppose your mortgage balance is $425,000, but your home would sell for about $400,000. Based on those two numbers alone, you have roughly $25,000 in negative equity. Home equity is generally the difference between what your home is worth and what you owe. In the second quarter of 2026, ATTOM reported that 3.2% of mortgaged residential properties were “seriously underwater,” meaning their combined loan balances were at least 25% higher than their estimated market value, up from 2.7% a year earlier. If you’re considering selling, however, that basic equity calculation doesn’t show how much you would actually walk away with — or need to bring to closing. That distinction is important because selling comes with expenses, and your actual mortgage payoff may differ from the balance shown on your latest statement. The Consumer Financial Protection Bureau explains that a payoff amount can include interest through the payoff date and certain unpaid fees in addition to the remaining loan balance. Not necessarily, says Eric Becerra, an experienced loan officer who has worked in the mortgage industry since 1997. He explains that homeowners need to understand an important distinction before making any decisions. “There’s a big difference between having negative equity and not being able to afford your mortgage,” Becerra says. If your payment is manageable, you’re current on the loan, and you don’t need to move, a drop in your home’s value may not require you to do anything right away. You can continue making payments, which gradually reduces your principal balance, and see how your home’s value changes over time. The situation becomes more pressing if you can no longer afford the mortgage, need to relocate, want to refinance, or have another reason you can’t simply stay put. Becerra cautions homeowners against making a major decision based only on a drop in estimated value. Instead, he recommends first looking at the mortgage balance, realistic home value, interest rate, and, most importantly, the homeowner’s goal. If you may need to sell, don’t stop at subtracting your estimated home value from the balance shown on your mortgage statement. What matters is whether the proceeds from a sale would be enough to pay off the mortgage and the other costs and obligations tied to the transaction. Start with these numbers: Sandra Rathe, a top-performing real estate agent with 17 years of experience, says this is why homeowners who may be underwater should look beyond the number on their mortgage statement. “We have to look at all of the pieces that go into the equation for when they sell,” Rathe explains. She says an experienced agent may need to account for the mortgage balance along with other property-related debts or fees before estimating what a homeowner would actually net from a sale. Here’s a simplified example: In this example, simply comparing the $400,000 sale price with the $395,000 mortgage might make it appear that the homeowner has $5,000 in equity. After estimated selling expenses, however, they could face a $19,000 shortfall. Your actual numbers will vary, so an agent can help estimate a realistic sale price and selling expenses, while your mortgage servicer can provide the payoff amount. Once you have a clearer picture of your equity, the next step is identifying what problem you’re trying to solve. Being $20,000 underwater while comfortably making your payment and planning to stay for another five years is very different from being $20,000 underwater when you need to relocate next month. Likewise, a homeowner struggling with an unaffordable payment may need to consider options that someone with stable finances does not. Becerra says the homeowner’s goal can change the entire conversation. Someone hoping to refinance, someone who must sell, and someone who is simply concerned that the property has lost value may each have a different course of action. “There’s just no one-size-fits-all solution when it comes to these types of situations,” he says. A helpful way to start sorting through your choices is: Each mortgage payment that reduces your principal balance can help narrow the gap between what you owe and what your home is worth. Rising home values could also help rebuild equity, but future appreciation isn’t guaranteed. Rathe says homeowners considering this approach should pay attention to their local market rather than assume values will rise enough to solve the problem. “It’s still going to be a risk to sit in it because you never know when the market will shift,” she says. An experienced local agent can help you assess recent comparable sales (called comps), inventory, buyer demand, and price trends. But your ability to comfortably make the mortgage payment may matter just as much as your market outlook. If staying means falling further behind, waiting for appreciation may not improve your position. Becerra explains that your options for refinancing an underwater mortgage depend heavily on what kind of home loan you have. “[Homeowners] assume that because they don’t have the equity that refinancing is completely off the table, and that’s not always the case,” he says. “What matters is the type of mortgage that they currently have.” Some government-backed mortgages have streamlined refinance options that may be available without relying on a new appraisal in the same way a conventional refinance typically does: Even when refinancing is available, Becerra says it still needs to improve your situation enough to justify the costs and new loan terms. As he puts it, “Just because you qualify, it doesn’t necessarily mean that you should do it either.” Compare the new interest rate, monthly payment, closing costs, repayment period, and total borrowing cost with your existing mortgage before deciding. Refinancing may change the terms of your debt, but it does not by itself erase negative equity. Refinancing and loan modification are sometimes discussed together, but they address different situations. “A refinance is replacing your existing mortgage with a new one while a loan modification changes the terms of the one that you already have,” Becerra explains. A refinance may be worth exploring if you’re current on your mortgage, financially stable, and seeking a lower rate, lower payment, or different loan terms. A loan modification, on the other hand, is generally a loss-mitigation option handled through your current mortgage servicer. It may be available to borrowers experiencing financial hardship and can involve changes such as extending the repayment period, adjusting the interest rate, or otherwise changing the payment structure. A lower monthly payment doesn’t always mean a lower overall cost. Extending the loan term, for example, could make the payment more manageable now while increasing how long you remain in debt or how much you ultimately pay. Becerra says if your mortgage is affordable, but you’re simply concerned about negative equity, you may not need either option. If the payment itself has become difficult, contact your mortgage servicer early to ask what assistance may be available. Waiting for equity to rebuild may not be realistic if you need to relocate for work, accommodate a growing family, or move for another reason. At that point, the question becomes whether you can sell despite the equity gap — or whether keeping the home temporarily makes more financial sense. Before listing, estimate your likely shortfall and talk with both a real estate agent and a mortgage professional. The amount you’re underwater can affect not only the sale, but also your ability to finance your next home. If the gap between your sale proceeds and mortgage payoff is manageable, one option is to bring enough money to closing to cover the difference. This allows the mortgage to be paid off in full without pursuing a short sale. For some homeowners, accepting that loss may make more sense than remaining in a property they can’t afford or waiting in hopes that its value rises. “Sometimes it’s better to stop the bleeding even though it’s painful to have to bring some money to closing,” Rathe says. Whether that makes sense depends on more than the size of the shortfall. Consider how long you could otherwise remain in the home, your monthly carrying costs, available savings, and what you expect to do after the sale. An underwater homeowner may be tempted to set the asking price high enough to cover the mortgage and selling expenses. But buyers generally base their offers on the home and local market — not the seller’s remaining loan balance. Rathe says this is one of the biggest mistakes she sees “They price the property based on what they need to get out versus what the market is willing to pay,” she says. “If you started off overpriced, they’re better off starting at a reasonable price, getting more activity, getting more people in the door and potentially creating more interest in the home.” Overpricing can be especially risky when every dollar matters. A home that lingers on the market may eventually require price reductions without eliminating the underlying equity gap. An experienced agent can prepare a comparative market analysis (CMA) using recent sales, competing listings, and current market conditions to help establish a realistic price. Repairs and improvements deserve extra scrutiny when you’re already facing a potential shortfall. Some inexpensive cosmetic work — such as fresh paint, cleaning, or simple do-it-yourself projects — could improve a home’s presentation without requiring a large investment. Bigger projects are harder to justify if the expected increase in sale price won’t cover what you spend. “There are some things that are cosmetic that don’t cost a lot, maybe some sweat equity that you can make some repairs yourself and not spend a lot of money that will make a big difference,” Rathe says. “For some repairs, it’s just throwing more money at an already difficult problem, and it’s not going to solve it.” Before taking on a major project, ask your agent how much it is realistically likely to add to the sale price. The goal isn’t necessarily to make the home perfect; it’s to determine whether spending the money improves your overall financial outcome. If you need to move but don’t want to sell at a loss, converting the home to a rental may be worth considering. But account for property taxes, insurance, HOA fees, maintenance, vacancies, and property management costs — not just whether the rent covers your mortgage payment. Keeping the property can also affect your ability to finance your next home. “Here’s something the homeowners usually don’t realize: You might have to qualify for both mortgage payments depending on your situation,” Becerra says. Rental income may help in some cases, but how much lenders can count varies by mortgage program and borrower circumstances. Before signing a lease or making an offer on another home, ask a lender how your existing mortgage and potential rental income would affect your qualification. Being underwater becomes more urgent when you’re also struggling to make the monthly payment. In that situation, don’t wait until you’re deep into delinquency to find out what assistance may be available. Start by contacting your mortgage servicer. Depending on your loan and circumstances, possible loss-mitigation options may include a loan modification, a repayment plan, forbearance, a short sale, or a deed in lieu of foreclosure. A HUD-approved housing counselor can also help you review your options at little or no cost. Becerra cautions against treating these solutions as interchangeable. “These options, they’re not interchangeable, and they can have very different long-term consequences,” he says. Those consequences can affect your remaining debt, credit, and ability to purchase another home, so make sure you understand the terms before agreeing to a solution. If you want to remain in the home, ask your servicer whether a loan modification could make the payment more manageable. If your hardship is temporary, other options such as forbearance or a repayment plan may also be available. Remember that lowering the monthly payment can sometimes extend the repayment period or affect how much you ultimately pay, so review the long-term terms as well as the immediate relief. If you need to leave the home and can’t sell for enough to repay the mortgage, your servicer may approve a short sale, allowing the property to be sold for less than the amount owed. Servicer approval is required, and additional mortgages or liens can make the process more complicated. An agent with short-sale experience can help manage the additional paperwork and lender involvement. Rathe recommends working with someone who understands the numbers and process involved with selling an underwater property. Before agreeing to a short sale, make sure you know what happens to the unpaid balance. “You want to understand whether the lenders agreed to forgive the remaining balance or not,” Becerra says. Depending on your state, loan, and agreement, the lender may waive the deficiency, or you could potentially remain responsible for some of it. Ask for any deficiency waiver in writing. Forgiven mortgage debt can also have tax consequences. Because the rules depend on your circumstances, consider consulting a tax professional or attorney if debt will be forgiven as part of the sale. A deed in lieu of foreclosure is an arrangement in which you voluntarily transfer ownership of the home to the lender rather than go through the foreclosure process. Unlike a short sale, you aren’t finding a buyer and selling the property yourself. You generally apply through your servicer and must receive approval. Before accepting a deed in lieu, find out in writing how any remaining mortgage balance will be treated. CFPB guidance notes that deficiency rules vary and recommends asking the lender to waive any deficiency when applicable. A deed in lieu may be worth discussing when staying in the home is no longer realistic and a regular or short sale isn’t workable, but it can still affect your credit and future borrowing. Foreclosure is the legal process through which a lender can ultimately sell a property after a borrower defaults. The process and timeline vary by state. Under federal servicing rules, foreclosure generally cannot begin until a mortgage is at least 120 days delinquent, although exceptions can apply. That doesn’t mean homeowners should use those 120 days as a waiting period. “The other thing I think is you don’t wait several months to start asking questions,” Becerra says. “They wait until things get a little too bad or they’re too deep underwater where maybe they could have got some help upfront.” If you think you may miss a payment, contact your servicer as early as possible. If foreclosure has already begun or you’ve received legal papers, CFPB also recommends considering an attorney. A HUD-approved housing counselor can provide free foreclosure-prevention counseling and help you work through the loss-mitigation process.What does it mean to be underwater on your mortgage?
Does being underwater mean you’re in financial trouble?
Find out how far underwater you really are
Estimated sale calculation
Amount
Expected sale price
$400,000
Estimated selling expenses
-$24,000
Proceeds before mortgage payoff
$376,000
Mortgage payoff
-$395,000
Estimated shortfall
-$19,000
Can you afford the mortgage, and do you need to move?
Your situation
Options you may explore
You can afford the mortgage and don’t need to move
Stay in the home, continue paying down the loan, and allow time for your equity position to change.
You can afford the mortgage but need to move
Calculate the cost of selling, consider covering a manageable shortfall, or explore whether keeping the home as a rental is practical.
You’re struggling with the payment but want to stay
Contact your mortgage servicer and ask about available hardship or loan modification options.
You’re struggling with the payment and need to leave
Depending on your circumstances, options may include selling, a short sale, or other alternatives offered through your mortgage servicer.
If you can afford your mortgage and stay
Wait and rebuild your equity
Can you refinance an underwater mortgage?
Refinance vs. loan modification: What’s the difference?
If you need to move while your mortgage is underwater
Sell and cover the shortfall
Don’t price the home based on what you owe
Should you make repairs before selling?
Could you keep the home as a rental?
What if you can’t afford your mortgage anymore?
A loan modification may help you stay in the home
What happens if you pursue a short sale?
What is a deed in lieu of foreclosure?
Don’t wait for foreclosure to start before asking for help
