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Underwater but Not Behind: Your Options When You Owe More Than It Is Worth

Owing more than your home is worth is not an emergency by itself. Here are your options, from staying put to a short sale, and how to tell which ones fit your situation.

Reviewed October 31, 2026 by George Lensch, broker, Wyze Realty. General information about Alabama, not legal, tax or financial advice.

Being underwater, or upside down, means you owe more on your home than it would sell for. It is stressful, but on its own it is not an emergency. If you can make your payments and do not need to move, you may not need to do anything at all. The hard decisions come when life forces a move or the payment stops being affordable. This guide walks through the options from least to most disruptive, so you can see which ones are open to you.

First, Find Your Real Number

"Underwater" can mean very different things. Owing $3,000 more than the home is worth is a different problem from owing $60,000 more. To get your real number:

1. Get a payoff figure. Ask your servicer for a written payoff statement for each loan on the house (first mortgage, second mortgage, HELOC). A payoff is usually higher than the principal balance on your statement.
2. Get a realistic value. What would the home sell for today, in its current condition? Online estimates can miss in either direction. We can give you a free opinion based on recent Valley MLS sales of similar homes.
3. Subtract the cost of selling. Commission, closing costs, any repairs or credits, prorated taxes and any HOA balance.
4. Look at the gap. Value minus selling costs minus payoffs. If it is negative, that is how far underwater you are in real terms.

Then ask two questions: Can I keep paying comfortably? Do I need to move? Your answers point to the options below.

Option 1: Stay and Keep Paying

If the payment is affordable and you do not need to move, staying put is often the least costly choice. Every payment reduces principal, and home values change over time, though no one can promise in which direction or how fast. Being underwater only becomes a loss you lock in when you sell.

• Keep insurance and taxes current and keep up maintenance, so the home holds its value.
• Revisit the numbers once a year, or before any major life change.
• If you have extra cash, see option 3.

Option 2: Rent It Out and Move

If you need to move but can afford to hold the home, renting it may cover some or all of the payment while the loan balance comes down. It also makes you a landlord, with real costs and risks. Before you choose it:

• Check your mortgage. Many mortgages include occupancy terms, and your insurance will likely need to change to a landlord policy. Ask your servicer and your insurance agent.
• Run the real numbers. Rent minus the payment, taxes, insurance, repairs, vacancy and any management fee. A small monthly gap can add up.
• Think about distance. Managing a rental from another state is harder than it sounds.
• Think about taxes later. Renting the home can affect the tax treatment of a future sale. Ask a CPA.

Our sell, rent or keep page helps compare the paths, and selling a rental with tenants covers what happens if you sell later with a tenant in place. If you are military with PCS orders, see selling or renting for a military move.

Trying to decide between selling, renting and waiting? Call (256) 808-6861 or schedule a confidential call. There is no cost and no obligation.

Option 3: Pay Down the Principal

Extra principal payments shrink the gap. Even modest amounts help if you have a year or two before you need to sell. Ask your servicer how to make sure extra money goes to principal, and check that your loan has no prepayment penalty. Weigh this against keeping an emergency fund; a house is hard to turn back into cash.

Option 4: Sell Normally and Bring Cash to Closing

If the gap is small enough that you can cover it, you can sell the home the regular way and bring the difference to closing. Because the lender is paid in full, no lender approval is needed, there is no short sale or forgiven debt to report, and the loan is simply paid off.

• Ask the servicer for an updated payoff close to the closing date.
• The closing attorney or title company will tell you exactly how much to bring and how to send it.
• Be wary of borrowing to cover the gap without understanding the cost; ask a financial advisor or HUD-approved housing counselor if you are unsure.

Option 5: Talk to Your Servicer About Your Payment

If the real problem is that the payment is no longer affordable, but you would like to stay, ask your servicer about home-retention options before you decide to sell. Depending on the loan, these can include forbearance, repayment plans, payment deferral or a loan modification. Fannie Mae's Flex Modification, for example, targets about a 20% principal and interest payment reduction. A HUD-approved housing counselor can help you apply at no cost. See options when you are behind on the mortgage and FHA, VA and USDA options. Wyze Realty does not offer loan modification services.

Option 6: A Short Sale

If you need or want to sell, cannot cover the gap and have a genuine hardship, a short sale may fit. The lender agrees to accept less than the payoff. You do not always have to be behind: under the 2012 Fannie Mae and Freddie Mac standard, current borrowers with hardships such as a death, divorce, disability, distant job transfer or military PCS orders could qualify. Ask your servicer what it requires today.

Remember the costs: forgiven debt is generally taxable, and the main-home exclusion has expired for most 2026 discharges unless Congress acts (the insolvency exclusion may still help). Lenders may ask for a contribution, and there are waiting periods before you can get a new mortgage. Read the full short sale guide.

Option 7: A Deed in Lieu

You sign the home over to the lender instead of selling it. It usually requires clean title and lender agreement, and it has many of the same tax and credit consequences as a short sale. See short sale vs. deed in lieu vs. foreclosure.

The Options Side by Side

What Not to Do

• Do not let insurance lapse or the house deteriorate; it lowers value and can cause new problems with the lender.
• Do not sign over your deed or enter a lease-back arrangement with anyone other than your lender without an attorney. See foreclosure rescue scams.
• Do not guess about taxes. A CPA can tell you what forgiven debt would cost you before you commit.

If you would like a free, realistic value and a plain look at the gap, Call (256) 808-6861 or schedule a confidential call. There is no cost and no obligation.

Common Questions

Talk It Through, Confidentially

Big decisions are easier with someone in your corner. Whether you are ready to sell, still deciding, or just need to understand your options, call or schedule a time to talk. The first conversation is free, private and comes with no obligation. If what you really need is an attorney, a CPA or a housing counselor, we will tell you that and point you in the right direction.

Schedule a Confidential Call Call or Text (256) 808-6861

Sources

• Fannie Mae, Servicing Retention Options
• Fannie Mae, What Is a Short Sale? (fact sheet)
• Freddie Mac, Servicing Loss Mitigation Options
• FHFA, Standard Short Sale Guidelines announcement, Aug. 21, 2012 (archived)
• Fannie Mae Selling Guide B3-5.3-07, Significant Derogatory Credit Events: Waiting Periods and Re-establishing Credit
• CFPB, Regulation X, 12 CFR 1024.41 Loss Mitigation Procedures
• IRS, Instructions for Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness)
• CFPB, Find a HUD-approved housing counselor

Related Guides

Wyze Realty LLC, Huntsville, Alabama. Information on this page is general and educational, is not legal, tax, financial or credit advice, and may not reflect the most current law. Consult an Alabama attorney, CPA or HUD-approved housing counselor about your situation. All real estate services are provided in accordance with the Fair Housing Act.