I’m underwater on my house: What does that mean and what are my options?

Swings in the housing market can translate to windfall profits — or devastating losses. And it’s difficult to predict which way the wind will blow. If you do find yourself underwater on your house, here’s what it means and what your options are.

What does it mean to be underwater?

If your home’s value drops quickly, you might find yourself “underwater” or “upside down” on your mortgage. This means you owe more on your loan than your house is worth.

This is a tough spot to land in, but it’s more common than you might think. In early 2019, more than 5.2 million U.S. properties were seriously underwater, with outstanding loan balances at least 25% higher than the value of the property. That equates to more than 9% of all U.S. properties with a mortgage.

If you’re one of the millions of Americans stuck in this situation, you’re probably wondering what to do next. First, stay calm. Then, consider the pros and cons of the following eight paths you can take to get back on top of the water.

1. Stay the underwater course and build more equity

If you can afford your monthly mortgage payments, staying in your home could be your best option. Because markets are always fluctuating, your home may recover some of its lost value over time — and you won’t lose money unless you sell your home when its value is low. 

Of course, there’s no guarantee your home’s value will fully recover. But you can also try to rebuild your equity by much more aggressively paying down your mortgage. And that might mean boosting your income. “Lean into the gig economy: walk dogs, drive for Uber or Lyft. Come up with some side hustle to earn some extra cash. And buckle down and shave off your costs, too,” says debt relief expert Michael Bovee, who is also the co-founder of Resolve. 

Related article: How to get rid of your debt for good

2. Consolidate your consumer debt

Lenders generally won’t refinance a home that’s underwater, but you’ll rebuild your equity faster if you can funnel more money to your mortgage. Consolidating your credit card debt can help you reduce those monthly payments, lower your interest rates and free up more cash each month to put toward your home.

Related article: 5 keys to successful debt consolidation

3. Modify your loan

If you can no longer afford your mortgage, ask your lender to consider reducing your monthly payment. While you will still have negative equity, this type of agreement will help you avoid larger financial losses in the long term.

4. Rent your home

In some markets, rental prices remain high when home values dip. Renting all or part of your home can be a good alternative to selling at a loss if you need to make a move or to bridge a financial gap. Research rental prices for similar properties in your area on sites like Zillow and Zumper to see how average rates compare to your mortgage payment. However, be sure to factor in the cost of taxes, insurance, regular maintenance and post-rental repairs into your monthly rate to avoid losing money on the deal. 

5. Take a loss on your underwater mortgage

If you need to move and decide to sell a home that’s underwater, you’ll need to pay your lender the outstanding balance on the loan at the time of the sale. This is an unappealing option, but it will get you out of your mortgage with your credit intact. 

6. Consider a short sale

If you’re unable to make the payments on your underwater mortgage, your lender may consider a short sale. This will be a last resort for the lender, who will have to absorb the financial loss, so you will likely need to prove financial hardship and explore all other loan modification options before a short sale is approved. 

Extenuating circumstances, such as the loss of a job or a death in the family, will generally be considered — but be aware that the lender will also require you to sell any other assets you own to reduce its losses. Most lenders also require a mortgage to be delinquent before they will consider a short sale, which means both the missed payments and the short sale will negatively impact your credit score, and sometimes for as much as seven years. 

7. Pursue a deed in lieu

If your lender rejects a short sale, you may be able to pursue a deed in lieu of foreclosure. In this scenario, the property owner surrenders the deed to the lender in exchange for being released from the mortgage agreement. However, lenders will generally not consider this option if there is more than one lien on the property. As with the short sale, a deed in lieu will appear as a negative mark on your credit report for seven years.

8. Foreclose on your property

If you default on your mortgage, your lender will eventually foreclose on your home. During a foreclosure, you’ll be forcibly evicted and your lender will seize your property. In addition to being financially and emotionally draining, a foreclosure will make it difficult to qualify for a new mortgage in the future. 

Whether you request a short sale, pursue a deed in lieu or go through foreclosure, you’ll have to wait two to seven years to qualify for a new mortgage. But the more proactive you are, the better you can position yourself for the future. For instance, the FHA will sometimes reduce new mortgage waiting periods for loan applicants who can demonstrate extenuating circumstances.

Managing an underwater mortgage can be painful, but it doesn’t have to cripple your finances for the long term. And the earlier you speak to your lender or a financial professional about your options, the better prepared you’ll be to find the best path forward.

Related article: Will I lose my house if I file for bankruptcy?