Increase in Underwater Mortgages: What Homeowners Need to Know

There has been a slight uptick in the amount of underwater mortgages based on new data from ATTOM. Once again, this triggers memories from the 2008 mortgage foreclosure crisis. With an underwater mortgage, your mortgage balance exceeds the value of the home. This can create endless issues with mortgage lenders which ultimately could result in a short sale to get rid of the property. Keep reading to learn more about underwater homes and your options as a homeowner.

Updated February 14, 2025.

Key Points:

• There has been a slight increase in the number of underwater mortgages nationally.
• An underwater mortgage means the homeowner owes more on the mortgage than the house is worth.
• If you have an underwater mortgage, you do have options.

The Latest Data on Mortgage Balances

ATTOM’s data revealed that last quarter, one in thirty-eight homes were underwater; now, it’s one in thirty-seven. This means that the house is worth less than the mortgage balance, making it much more difficult to sell the home. This could result in endless complications for homeowners.

For example, if the homeowner is trying to relocate and there is negative equity or the home is upside down unless the bank is willing to accept a short sale, that home would not be able to sell.

A short sale means the mortgage lender is willing to accept less than what is owed on the mortgage balance. Assuming the mortgage lender approves a short sale, there are still potential tax consequences for the portion of the mortgage not paid off. This means the mortgage lender would send you a 1099.

Underwater Mortgages

A “seriously underwater” mortgage is when the outstanding balance is more than the property is worth by at least 25%. That amounts to 2.7% nationally, a slight increase from 2.6% last quarter.

Which States Have the Most Underwater Mortgages

Kentucky currently has 8.3% of homes underwater compared to the previous quarter of 6.3%. West Virginia’s underwater housing market is estimated at 5.4%, while Oklahoma stands at 6.1%, Arkansas at 5.7%, and Delaware at 2.7%.

What Caused the Increase in Underwater Mortgages

During the COVID-19 pandemic, mortgage rates were incredibly low. During that time, we saw the value of real estate increase substantially. However, fast forward, the Federal Reserve has increased rates to curb inflation.

Higher mortgage interest rates increase the monthly payments, making it more expensive to own a home. Mortgage interest rates are currently in the 7% range, and with home values continuing to surge, this causes an increase in underwater mortgages.

What to Do if Facing an Underwater Mortgage

Getting out of an underwater mortgage can be challenging. It makes me think of the saying that staying out is easier than getting out. That means if you are facing a situation where you are considering relocating and housing continues to plummet in your area, it might be better to sell as quickly as possible. If not, you are stuck with a property you cannot sell. Since this happened to me, unfortunately, I consider myself an expert.

• Foreclosures Continue to Rise? Now What? Relax!

I have discussed this before in other blog posts, including my situation where my home was seriously underwater; unfortunately, at the time, I was living in Miami, FL, one of the hardest hit areas by the mortgage foreclosure crisis.

While I correctly predicted that the housing market in Miami was going to collapse, my prediction while right, my timing was off. Unfortunately, because of hurricane damages, the housing market had already crumbled by the time I settled with the insurance company. Homes in Miami dropped as much as 50%.

However, if you are facing this issue, you can try a short sale by applying with your mortgage lender. Of course, if you cannot play the long game, meaning you plan to live at your home for a long time so that the housing market will bounce back slowly but surely, then you might have to sell sooner rather than later.

Do you have any questions regarding short sales that you want to ask me? Then please send me an e-mail at alex@bankruptcy.blog. If your question is chosen, a response will be posted in the Reader’s Questions Forum. Of course, no identifying information will be posted to protect your privacy.

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