Let's say you mortgage a house in 2014 for $250,000. Fast forward five years, the market has crashed, and the house is now worth $150,000.

Your house is now $100K underwater.

What is the best way to stop paying a $250,000 mortgage, and start paying a $150,000 one?

Preferably while still keeping your credit sane, or at least without completely destroying it.

  • 12
    There are some Federal-backed or State-backed programs to refinance underwater loans to lower/fixed rates. But if you borrowed $250K, you owe $250K. The house value doesn't change that.
    – littleadv
    Jun 4, 2014 at 18:00
  • 5
    Since the question is hypothetical, you need to decide what your credit is worth. For some people, the $100K loss is best left for the bank. Especially if you live in a non-recourse state. Jun 4, 2014 at 18:17
  • 3
    @JoeTaxpayer: Of course, defaulting on the mortgage will not achieve the desired goal of paying a $150,000 mortgage and (I assume) continuing to live in the house. Instead, you'll have no mortgage, no house, and no credit. Jun 4, 2014 at 19:43
  • 2
    @NateEldredge - and with all due respect to the one answer below - how many people can write a check today for $100K? Jun 4, 2014 at 21:24
  • 28
    I thought this was going to be a question about painting a house that was actually in water.
    – AaronLS
    Jun 4, 2014 at 23:58

4 Answers 4


Repay $100,000 of the mortgage in cash. That's the best way to reduce the mortgage while preserving your credit rating.

  • 33
    @Soviero You borrowed $250,000 so therefore you owe $250,000 plus interest. The only reason the bank is interested in the house when you got the mortgage is because it is used as collateral.
    – Zoop
    Jun 4, 2014 at 17:47
  • 17
    @Soviero - mortgages don't shrink or grow depending on the current value of the home - they are based only on what you borrowed. Otherwise, when home values rise, your monthly mortgage bill would increase as well. Nobody wants that! Jun 4, 2014 at 19:57
  • 9
    @Soviero: the house could be uninsured, burn to the ground and be worth nothing other than the land it formerly stood on. You'd still owe the bank $250k. The fact that the house is security on the loan doesn't mean the loan is forgiven if the house loses value. It just means the loan is no longer fully secured. Jun 5, 2014 at 12:41
  • 1
    Wow, an incorrect answer that currently is at +28.
    – psr
    Jun 5, 2014 at 18:57
  • 2
    @psr unleash the knowledge
    – coburne
    Jun 5, 2014 at 19:01

The two options I know of that you have involve either a short sale, or a government assistance program.

Government Assistance

In the last couple years there were a few government programs established to help those who were underwater, but usually only if you only had one house(intention was to be no help to the irresponsible who bought up secondary properties during the bubble and contributed to the bubble).

One such program was the Hardest-Hit Fund, but was offered to only a few states effected the most by the housing crash. In Florida the program was managed by FHFC, but those eligible were reached out to from lenders. It was kind of unfortunate that it was done this way, because you could fall through the cracks based on the diligence of the particular company or poorly defined eligibility criteria. You pretty much had no power to initiate the process on your own.

Each states used the funds in different ways. Among them, either assisting the refinancing the existing mortgage(which is what you seem to want to do), or helping cover the difference for a short sale so that the home owner could move into more affordable housing.

Here is an example of exactly what you are trying to do, which is reduce your principal: Principal Reduction

If you contact your state's housing agency, they might be able to tell you if there is any assistance possibly available for you. I do not know how other states structure their housing agency, but Florida's has a single-family division of their agency that would deal with such inquiries.

Short Sale

If you are willing to part with the existing home and find one of equivalent value, then a short sale might be an option.

You would sell the home for what it is worth, the bank would need to approve the short sale and take a loss, and you would basically walk away with nothing in pocket. This means you will have to furnish your own down payment for a new home.

Then you could look for a $150K home and purchase that home, and thus your goal of living in a $150K valued home with a $150K mortgage would be obtained.

However, such sales are sometimes difficult as it can take a couple months for the bank to approve the sale(if at all). Depending on your mortgage, the bank may be able to actually turn around and sue you for their loss, even though they approved the short sale. So you would certainly want to consult with a professional before pursuing this option.

Disclaimer: I do not know how either of these options will effect your credit. The former is likely to effect it little, the latter is likely to effect it negatively(to the extent of "completely destroying" I do not know).

  • 7
    When a short sale occurs, the bank will likely issue a Form 1099 indicating that the loss that the bank incurred is income to the (ex)-homeowner, and taxes will have to be paid on that phantom income. Jun 5, 2014 at 0:39
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    @DilipSarwate: US Congress might extend the Mortgage Debt Relief Act. It expired in December 2013. I fell into the 2007-2013 window with my 2012 short sale. Never paid any extra taxes. Jun 5, 2014 at 16:35
  • 3
    If the OP chooses a short sale, then a conventional loan rules says he cannot buy another home for at least 3-4 years. FHA is 3 years, VA loan is 2 years. Also, many banks require you to be late on the mortgage to execute the short sale (sometimes). Under HAFA, it's not required to be late but it forces the bank's hand. That being said, if you are late then you have to wait the maximum time to get another mortgage (aka cooling off period). Otherwise, you can get another home immediately depending on the backer. For instance, VA will let you get one immediately. Jun 5, 2014 at 16:37
  • @staticx Good point, this is probably why some families sell an underwater house and move into a rental for a couple years.
    – AaronLS
    Jun 5, 2014 at 20:44
  • @AaronLS: Hence why I am in a rental :) Jun 5, 2014 at 21:18

Mortgages don't shrink or grow depending on the current value of the home - they are based only on what you borrowed.

If you borrowed $250k, that's what you owe (plus interest). The house might be worth $250k, or $0, or $1000k - it doesn't matter.

Otherwise, when home values rise, your monthly mortgage bill would increase as well. Nobody wants that!

What is the best way to stop paying a $250,000 mortgage, and start paying a $150,000 one?

You might be able to renegotiate the mortgage with your lender (unlikely). You might choose to declare bankruptcy (at the cost of your credit rating). Otherwise, you are generally out of luck.

  • 1
    I believe the term for renegotiating a mortgage is a "cram down." My understanding (which is slim) is that cram downs might happen in commercial real estate, but almost never in residential. (A notable exception was when one US bank was paid by the government to do cram downs on their most reliable loans. They were trying to head trouble off at the pass.)
    – MrChrister
    Jun 6, 2014 at 13:52

While HAMP Loan Modification has guidelines for principal reduction, it is not a reduction all the way down to the new market value. Investors owning your loan have to be willing to allow the principal reduction, and the director of Freddie Mac and Fannie Mae said they won't do these reductions on loans they own, preferring instead to add more time or a non-interest bearing balloon.

It is not risk free. There have been a lot of problems reported in the news with "lost paperwork" and dual tracking with HAMP as well. With dual tracking, borrowers think they've succeeded but are foreclosed upon anyway.

I've written a Free Unofficial HAMP Loan Modification Calculator that allows exploring the mathematical consequences of the guidelines.

However, if you look through the loan modifications examples database, there is a lot more variability in outcomes than a strict following of the guidelines would suggest.

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