How to Get Rid of an Underwater Mortgage

How to Get Rid of an Underwater Mortgage
••• Hemera Technologies/ Images

No one wants to be underwater on a mortgage loan, meaning you owe more on your loan than what your home is worth. This can cause problems when you're trying to sell your home or refinance it. If you want to sell your home, you'll have to charge less than what you owe, taking a loss. When you refinance, most lenders require you to have a certain amount of equity in your home -- something you won't have if you're loan is underwater. Fortunately, you can take steps to get rid of that underwater mortgage.

Talk to Your Lender

Call your mortgage lender and ask if it is willing to reduce the principal balance of your mortgage loan. You might have more leverage if you're actually suffering a financial hardship. One of the ways lenders can do this is by reducing a loan's principal balance, something that might -- if the balance is reduced by a large enough amount -- move you out of underwater status. You'll need to meet the lender's requirements, which could including, among other things, providing sufficient information to prove that you are suffering a financial hardship.

Explore a Short Sale

Ask your lender if you can sell your home through a short sale if it will not work with you to reduce the principal balance of your mortgage loan. In a short sale, your lender allows you to sell your home for less than what you owe on your mortgage. The lender covers the resulting loss. If you owe $200,000 and sell your home for $180,000, the lender will absorb the $20,000 loss.

Short sales, though, can prove challenging. Even if you accept a buyer's offer, your lender must also approve it. If your lender denies the offer, your home will stay on the market. Most lenders will only approve short sales if you can prove, through copies of such documents as your bank account statements, tax-return statements, credit-card bills and paycheck stubs, that you can no longer afford your monthly mortgage payments.

Use a Deed in Lieu

Ask your lender for a deed in lieu of foreclosure. In this arrangement, homeowners who can no longer afford their monthly mortgage payments voluntarily give ownership of their home to their mortgage lender. Homeowners are usually not financially responsible for any loss that the lender incurs by accepting a deed in lieu of. Lenders will require that homeowners prove -- through copies of their bank statements, credit-card bills and paycheck stubs -- that they are suffering a financial hardship before they approve a deed in lieu of foreclosure.

Pay the Difference

Sell your house for a loss and pay the balance due, if you can't find any other way to get rid of your underwater home loan. For instance, if you sell your home for $180,000 but you owe $190,000 on it, you'll owe $10,000 to your mortgage lender, which will be due at the sale closing.