ABA Family Legal Guide

Home Ownership

The Financial Side of Home Ownership

Understanding Your Mortgage

What can I do if falling home prices have eliminated my equity?

Homeowners can find themselves in this situation if they bought when housing prices were soaring and the home market later collapsed.

This is a difficult problem if you're trying to sell or refinance. If you sell, you may owe the lender more money than you receive from the sale, because the sale price is lower than the remaining mortgage. If you're trying to refinance, a lender will want to know that you have at least 20 percent equity in the home, but an appraisal may not bear this out. Don't accept the first appraisal. You may find that another appraiser will give your home a higher value.

Unfortunately, if your equity has fallen below what you owe on your mortgage, there's little you can do. If you must sell, you'll have to take a loss on your home and perhaps pay the bank the remaining balance (to retain a good credit rating.) If you're trying to refinance, you may be able to talk to your lender and renegotiate more favorable rates on your outstanding mortgage. The one exception is for homeowners who have FHA and VA loans--they can apply for a special refinancing without an appraisal. (See "Refinancing FHA and VA Loans," page 200.)