What to Do If Your Mortgage Is Underwater?

Find out Money Girl's 3 smart solutions to come out on top of an underwater mortgage.

Laura Adams, MBA
2-minute read

Underwater Mortgage Short SaleQ. "We have a growing family and need to buy a bigger home. However, we owe more on the mortgage than the property is worth right now. What options do we have?"

A. Owing more for something than its market value is called being “underwater” or “upside down” on your loan.

For instance, let’s say your mortgage balance is $200,000, but you can only net $180,000 after all selling expenses. This could be a problem if you need to sell your existing home in order to afford a new one.

However, here are 3 solutions for dealing with an underwater property:

  1. Pay the difference out-of-pocket. If you have enough savings, use it to pay your lender the loan shortage, which is $20,000 in my example. This allows you to satisfy your debt in full. If this option wouldn’t leave you with enough down payment money to buy another home, consider renting one instead.  
  2. Do a short sale. This is when the lender agrees to take less for your debt than you owe. While this sounds like an easy out, doing a short sale will hurt your credit. It could be difficult to get approved for another mortgage—or you could only qualify at a high interest rate.   
  3. Rent your home. Consider turning your home into an income property that covers your monthly expenses. Then you can use the rental income to help get approved for another mortgage—or to lease your next home, instead of buying one.

Other Links You Might Like:

5 Ways to Get a Loan with Bad Credit

How to Buy a House with Someone Else

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Credit Score Survival Kit – a free multimedia video tutorial with 3 strategies to raise your credit scores!

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House Sinking image courtesy of Shutterstock

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.