5 Things to Do if You're Upside-Down on Your Mortgage

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  • A downside of homes selling for more than appraised value is how many people could be left upside-down on their mortgages, owing more than the home is worth.
  • Waiting it out may be the best move for a homeowner who is underwater.

Whether you tough it out or sell the property at a loss, there are options available.

A nasty thing happened to my husband and I during the 2008 housing crisis. We were transferred to another state and had to sell our home just as the market was collapsing. After fees and other expenses associated with selling, we ended up with less than we owed on the property. To make things right, we showed up at closing with a big, fat check to make up the gap between what we were receiving for the house and the amount we still owed. It was a powerful lesson. Real estate does sometimes lose its value.

What we experienced was called being "upside-down" or "underwater." If you find yourself in the same predicament, here are five options worth considering.

1. Make sure you're truly underwater

There are two major players when it comes to making sure you're really underwater: Your lender and a reputable home appraiser. I would normally include a real estate agent in this equation, but another lesson we learned in 2008 was that some agents blow smoke. Our agent (the same one who sold us the house) inflated the value of the home so we would sign with her again. It wasn't until she had the listing that she gently suggested we lower the asking price.

Here's what I suggest:

  • Call your mortgage lender to learn how much you owe on the mortgage.
  • Hire a well-respected home appraiser to give you an unbiased opinion of how much your property is worth. An appraisal will cost somewhere around $400 to $500, but it's a small price to pay to know what you're dealing with.

You may find that things aren't as bad as you imagined. At the very least, you'll have concrete numbers to work with. For example, if the lender says you owe $200,000 and the appraiser says the house is worth $190,000, you have a $10,000 gap to make up.

2. Sell your house, and bring a check to closing

If you're being transferred or must move, selling the house and taking the money from savings to pay the difference may be your best move – although it's incredibly painful. While I don't consider this a last resort, it's certainly near the bottom of the list.

3. Stay put and pay down the principal

Ideally, you are able to stay in the house long enough to pay down the balance. Rework your monthly budget to find extra funds to pay toward the principal or take on a side hustle until the balance drops. Just make sure you continue to make all your mortgage payments on time so your credit score does not take a hit.

4. Find out if your loan is assumable

Ask your lender if you have an assumable mortgage. Typically, when someone assumes your loan, they give you an agreed-upon amount of money, the title is transferred to them, and they're responsible for all future payments. If you're underwater, there's next to no chance someone is going to give you money. Still, you may find someone who's willing to assume the debt, particularly if they have enough money to pay the mortgage down so it's no longer upside-down.

5. Consider a short sale

A short sale is truly a last resort option if you can't afford to make your mortgage payments. Here's how it works:

  • You must prove to your lender that you can't afford the payments and there is no way you can get caught up.
  • The lender agrees to allow you to sell your home for less than you owe.
  • You partner with a real estate agent who has experience in short sales.
  • The home goes on the market.
  • You negotiate terms with a potential buyer, but it's ultimately up to the lender whether an offer is approved.

Once the deal is done, you no longer have a mortgage but your credit score is damaged and the short sale remains on your credit report for seven years. That's not to say you can't recover from it (you can recover from anything), but it will take time and effort.

There's nothing fun about being upside-down on your mortgage, but you have options. And honestly, most of us have hit a financial wall at some point in our lives. The idea is to learn what you can from it. It's how we grow.

Our Research Expert

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