How to Resolve Underwater Mortgages and Negative Equity

An underwater mortgage is defined as a home purchase loan for which the principal (i.e. the original amount owed) is more than the value of the home in the free market, which leads to negative equity. In other words, the homeowner owes more than the home is worth. Most commonly, an underwater mortgage — also known as an upside-down mortgage — occurs when home values in a particular area are decreasing.

The 2008 financial crisis was perhaps the biggest example of a widespread underwater mortgage phenomenon, which occurred in part due to less rigorous lending requirements and a heightened level of foreclosures and defaults.

You probably already know if you have an underwater mortgage, but you can double check by determining how much you owe on your mortgage, how much your home is currently worth, and subtract the amount you owe from your home’s value. When a mortgage goes underwater, it can cause a laundry list of problems for a homeowner, including the inability to refinance or sell their home unless they have the cash in hand to pay for the difference. In addition, it usually eliminates equity available for credit.

The good news is that if your mortgage has already gone underwater, you may be able to reverse it. Here are some ways to get started.

Create a Budget

One of the easiest and most common ways to do this is by cutting costs through creating a budget and making your mortgage payments your top priority. It might not be the most fun exercise in the world, but you’ll thank yourself later when you’re able to get back on track and begin building equity in your home once again.

Read “4 Steps to Personal Financial Planning” and document your spending with the helpful budget tracking sheet.

Increase Your Home’s Value

Another way is to grow your home value and in turn, your home equity. Some ways to do this include upgrading appliances and finishes, investing in energy-efficient features like a smart thermostat, lighting, windows, and doors. Don’t forget about curb appeal, either; improving your home’s exterior and landscaping can go a long way to boost the worth of your home.

Refinance with FMERR

While you won’t be able to qualify for a traditional refinance if you have negative equity, there’s another program that may be able to help you. The Freddie Mac Enhanced Relief Refinance (FMERR) Program, which replaced the HARP (Home Affordable Refinance Program) is an option designed for homeowners who want to refinance but don’t have enough home equity for a conventional refinance.

You’ll still need to meet certain criteria to qualify for financing through the FMERR program. Some of the qualifiers include: 

• Initial mortgage closed on October 1, 2017 or later
• A 15-month seasoning period since closing on your mortgage or refinancing
• Less than 3% equity in your home (or in other words, an LTV ratio above 97%)
• No delinquent mortgage payments

Sell Your Home Through a Short Sale

If you have an underwater mortgage, you can’t afford your monthly payments, and you don’t have the money to make up the difference between your home’s value and your current mortgage balance, a short sale might be an option. With a short sale, your lender needs to agree to sell your home for less money than you owe on it, which means that they lose money. Because of this, it’s typically a last resort after you’ve demonstrated that you’re unable to handle your monthly payments and don’t have any way of making up for them. Short sales also typically have a negative effect on your credit.

Plan Ahead with a Home Equity Investment

If you do have a good amount of positive equity in your home, or if you’ve recovered from an underwater mortgage, you may be eligible for a Hometap Investment. A home equity investment with Hometap will keep your mortgage above water and allow you to pay off debt, grow your home’s value through a renovation, or handle life expenses. You’ll get cash in exchange for a percentage of your home’s future value, and there aren’t any monthly payments, so you can focus on prioritizing on paying for what’s most important to you right now.

The more you know about your home equity, the better decisions you can make about what to do with it. Do you know how much equity you have in your home? The Home Equity Dashboard makes it easy to find out.