An Explanation of the Terms Walk Away and Underwater
- Jul 27
- 4 min read
Updated: 4 days ago
Owners might leave a property without further mortgage obligations if specific legal conditions and local regulations allow for this action. A property is considered to have negative equity when the total debt exceeds the current market price.
As an example, a house is in this state if the owner owes $400 000 while the market value is $300 000, which creates a $100 000 difference between the loan balance and the asset value.
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Understanding "Walk Away" and "Underwater": A Homeowner's Guide
If you've heard the terms "underwater" and "walk away" used in conversations about mortgages and home values, you're not alone in wondering exactly what they mean — and whether they apply to your situation.
This article breaks down both terms in simple language, so you can understand your options with confidence.
What Does "Underwater" Mean on a Mortgage?
Underwater (also called "upside down") describes a situation where you owe more on your mortgage than your home is currently worth.
Example: If you owe $280,000 on your mortgage but your home would only sell for $250,000 in today's market, you're underwater by $30,000.
This typically happens when:
Home values drop after you purchase
You bought at the peak of a local market
You took out a second mortgage or home equity loan on top of your original loan
You made a very small down payment, leaving little equity cushion
Why Being Underwater Matters
Being underwater doesn't mean you're in default or behind on payments — it simply means your home's equity (the difference between what it's worth and what you owe) is negative. It becomes a practical concern mainly if you want to sell, refinance, or need to access equity.
What Does "Walk Away" Mean?
Walking away refers to a homeowner choosing to stop making mortgage payments and letting the home go into foreclosure — usually because they're underwater and see no financial benefit in continuing to pay.
This is sometimes called a strategic default: the homeowner isn't necessarily unable to pay, but decides it doesn't make financial sense to keep paying down a loan that's larger than the home's value.
Walking Away Is Not a Simple "No Consequences" Choice
Before considering this path, it's worth understanding the real trade-offs:
Credit impact: A foreclosure can significantly damage your credit score and stay on your report for up to seven years.
Possible deficiency judgment: In some states, lenders can pursue you for the difference between what you owed and what the home sold for at foreclosure.
Tax implications: Forgiven mortgage debt can, in some circumstances, be treated as taxable income.
Future borrowing: Qualifying for another mortgage, car loan, or even certain rental applications may be harder for several years.
Underwater vs. Walk Away: How the Terms Connect
Term | What It Means | When It Applies |
Underwater | You owe more than the home is worth | A description of your loan-to-value position |
Walk Away | Choosing to stop paying and let the home foreclose | An action some underwater homeowners consider |
In short: being underwater is a financial condition. Walking away is a decision some people make in response to it — but it's only one of several possible paths.
What Are My Options If I'm Underwater?
Before deciding to walk away, homeowners typically explore:
Staying and waiting it out — home values often recover over time
Loan modification — negotiating new terms with your lender
Refinancing programs — some programs exist specifically for underwater borrowers
Short sale — selling for less than what's owed, with lender approval
Deed in lieu of foreclosure — voluntarily transferring the home to the lender, which can be less damaging than a full foreclosure in some cases
Each option carries different credit, tax, and legal consequences, and the right choice depends heavily on your state, loan type, and financial picture.
Why This Matters
Understanding these terms clearly — before you're in a high-pressure situation — helps you:
Recognize where you stand financially
Avoid decisions driven by fear or misinformation
Ask the right questions when speaking with a lender, housing counselor, or attorney
Compare all realistic paths forward, not just the most talked-about one
Frequently Asked Questions
What does it mean to be "underwater" on a house?
Being underwater on a house means you owe more on your mortgage than the home is currently worth. For example, owing $300,000 on a home now valued at $270,000 means you're underwater by $30,000.
What does "walking away" from a mortgage mean?
Walking away from a mortgage means a homeowner stops making payments and allows the property to go into foreclosure, typically because they owe more than the home is worth and see no financial benefit in continuing to pay.
Is walking away from a mortgage illegal?
No, walking away from a mortgage is not illegal. However, it can lead to foreclosure, credit damage, potential deficiency judgments (depending on the state), and in some cases tax consequences on forgiven debt.
Can being underwater force you to walk away?
No. Being underwater is simply a financial condition — it doesn't require any action. Many underwater homeowners continue making payments and wait for property values to recover, or explore alternatives like loan modification or refinancing.
How do you find out if you're underwater on your mortgage?
Compare your current mortgage payoff balance (found on your loan statement) to your home's current market value (from a recent appraisal, comparable sales, or an online estimate). If your balance is higher than the value, you're underwater.
What's the difference between walking away and a short sale?
Walking away means stopping payments and letting the home foreclose without lender involvement in the sale. A short sale means selling the home for less than what's owed, with the lender's approval — generally considered less damaging to credit than a foreclosure.
Get Clarity Before You Decide
Every homeowner's situation is different, and the right path depends on your loan, your state's laws, and your long-term goals. before making a decision about an underwater mortgage — understanding your full range of options is the first step toward the best outcome for your finances.
Talk to a qualified real estate attorney experienced in mortgage relief →
To learn more, please contact San Diego Real Estate Attorneys today -- Go to RealEstateAttorneySanDiego.com or call (800) 233-8521 for a complimentary phone consultation.
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