What Are My Options If I Owe More Than My House Is Worth?
Homeowners who owe more than their house is worth in Greater Houston have six options: keep paying, pay down principal faster, rent the home out, sell and bring cash to closing, negotiate a short sale, or request loss mitigation. Mohebbi Realty Group in Katy, TX guides homeowners through all six.
TL;DR
Negative equity only becomes an urgent problem when a homeowner needs to sell, needs to refinance, or cannot make the payment — otherwise it is a paper loss that principal paydown resolves over time.
ATTOM reported that 3.2% of mortgaged U.S. residential properties were seriously underwater in the first quarter of 2026, the highest share since the first quarter of 2022.
The Houston Association of Realtors reported a median single-family sales price of $340,000 in July 2026, up 0.6% year over year, with a record 40,750 active listings on the market.
FHA borrowers gained a new permanent loss mitigation waterfall that mortgage servicers were required to implement beginning February 2, 2026, including Partial Claim, Loan Modification, and Payment Supplement.
Under Texas Property Code Section 51.003, any suit to recover a deficiency after a foreclosure sale must be filed within two years of that sale, and the borrower may ask the court to offset the deficiency by the property's fair market value.
The federal Qualified Principal Residence Indebtedness exclusion expired January 1, 2026, which means forgiven mortgage debt in August 2026 may be taxable unless another exclusion applies.
Key Takeaways
Get a real number before making any decision. An automated estimate is not a payoff quote and is not a market analysis.
Call the mortgage servicer before missing a payment, not after. Loss mitigation options are widest while the loan is current or newly delinquent.
Talk to a CPA before signing anything that forgives debt. The tax exclusion that protected short sales through 2025 is no longer in effect as of August 2026.
What does it mean to be underwater on a mortgage?
A homeowner is underwater when the total balance owed on all loans secured by the property exceeds what the property would sell for today. The gap is called negative equity. A house valued at $355,000 with a $378,000 first mortgage balance carries roughly $23,000 of negative equity before any selling costs are counted.
Selling costs matter more than most homeowners expect. Between commissions, title fees, survey, and typical seller concessions, a Greater Houston seller should model 7% to 9% of the sale price in transaction costs. A homeowner with $5,000 of positive equity on paper can still be functionally underwater once those costs are subtracted.
Effective equity is the number that actually governs decisions: estimated market value, minus all lien balances, minus estimated closing costs.
How common are underwater mortgages in 2026?
Negative equity is uncommon nationally but rising. ATTOM's first quarter 2026 U.S. Home Equity and Underwater Report found that 3.2 percent of mortgaged residential properties were seriously underwater, meaning combined loan balances exceeded estimated market value by at least 25 percent, while 43.3 percent of mortgaged properties were equity-rich — down from 44.6 percent the prior quarter and the lowest equity-rich rate since the fourth quarter of 2021.
The Houston picture is more stable than the national trend line suggests. HAR's July 2026 Housing Market Update reported 8,340 single-family homes sold, up 1.6% year over year, a median price of $340,000, up 0.6%, and an average price of $440,816, up 1.9%. Active listings reached 40,750, the highest level HAR has ever recorded.
That combination — flat prices plus record inventory — is what creates negative equity locally. Values are not falling sharply. They simply stopped rising fast enough to outrun closing costs for buyers who purchased at peak pricing with a small down payment.
Who is most likely to be underwater in Greater Houston right now:
Buyers who closed between 2022 and 2024 with 3% to 5% down
Buyers who financed builder incentives, upgrades, or lot premiums into the loan amount
Homeowners who refinanced and rolled closing costs into the new balance
Homeowners carrying a second lien, HELOC, or solar loan alongside the first mortgage
Homeowners in a community where the builder is still selling new inventory at competitive pricing
Can I stay in the home and wait it out?
Staying put is a legitimate strategy, not avoidance. Negative equity has no practical consequence for a homeowner who can make the payment and does not need to move. Every monthly payment reduces the principal balance, and in a market holding near flat, amortization alone closes the gap over time.
A homeowner with a 30-year fixed loan in year four is paying down roughly $500 to $650 of principal per month on a $350,000 balance, and that figure grows every month. Adding even $250 per month directly to principal can pull the break-even date forward by more than a year.
Can I refinance if I owe more than my house is worth?
Conventional rate-and-term refinancing generally requires equity, but two government programs do not. FHA borrowers may qualify for an FHA Streamline Refinance, and eligible veterans and service members may qualify for a VA Interest Rate Reduction Refinance Loan (IRRRL). Both are designed to reduce the interest rate and, in many cases, do not require a new appraisal — which means current market value does not automatically disqualify the borrower.
Eligibility, seasoning requirements, and net tangible benefit tests apply, and only a licensed mortgage lender can determine whether a specific loan qualifies. Mohebbi Realty Group can refer homeowners to lenders who handle these programs.
What happens if I have to sell while underwater?
A homeowner who must sell has three realistic paths, and they differ sharply in cost, timeline, and credit impact.
Renting deserves a closer look before it gets dismissed. Houston's median single-family rent was $1,918 in July 2026, essentially flat month over month and down slightly year over year. If market rent covers principal, interest, taxes, insurance, and HOA dues with margin left for vacancy and repairs, holding the property while equity rebuilds can be the lowest-cost path. Before committing, a homeowner should confirm that the HOA permits leasing, since several Katy and Fulshear communities cap the number of leased homes.
How does a short sale work in Texas?
A short sale is a sale in which the lender agrees to accept less than the full payoff and release the lien so the transaction can close. The homeowner lists the property, accepts an offer, and submits a lender package that typically includes a hardship letter, financial documentation, a settlement statement, and the purchase contract.
Two Texas-specific points deserve attention.
First, deficiency. Texas Property Code Section 51.003 provides that any action to recover a deficiency after a foreclosure sale must be brought within two years of that sale, and that a borrower may ask the court to determine the property's fair market value as of the foreclosure date. If the court finds fair market value exceeded the foreclosure sale price, the borrower is entitled to an offset against the deficiency. Whether a lender waives or pursues a deficiency in a short sale is a negotiated term, and it should be addressed in writing before closing.
Second, loan type. Texas home equity loans made under Article XVI, Section 50(a)(6) of the Texas Constitution carry restrictions that do not apply to standard purchase-money mortgages. Only a licensed Texas attorney can determine how those provisions apply to a specific loan.
Mohebbi Realty Group holds the Short Sales and Foreclosure Resource (SFR) certification from the National Association of Realtors, and we coordinate the listing and lender-package side of the transaction alongside the homeowner's attorney and CPA.
What if I cannot make the mortgage payment at all?
Contact the mortgage servicer's loss mitigation department immediately. Options are widest before the loan reaches serious delinquency.
HUD announced an updated set of permanent loss mitigation options for FHA-insured single-family mortgages that servicers were required to implement beginning February 2, 2026, replacing the temporary COVID-era framework that remained in place through February 1, 2026. Under the current framework, a Payment Supplement uses a Partial Claim to resolve delinquent payments and temporarily reduce the monthly payment for three years, and a borrower may receive only one permanent home retention option — Partial Claim, Loan Modification, Combination Loan Modification and Partial Claim, or Payment Supplement — within any 24-month period, unless affected by a Presidentially Declared Major Disaster.
Conventional loans backed by Fannie Mae or Freddie Mac, VA loans, and USDA loans each carry their own workout menus. A HUD-approved housing counseling agency provides free guidance and does not sell anything; agencies can be located through HUD's counselor search.
The escalation ladder, in order:
Repayment plan or forbearance
Loan modification or partial claim
Short sale
Deed in lieu of foreclosure
Foreclosure
Will I owe taxes on forgiven mortgage debt in 2026?
Possibly, and this changed recently enough that many homeowners have not heard about it. Forgiven debt is generally treated as taxable income. The Qualified Principal Residence Indebtedness exclusion, which shielded forgiven mortgage debt from federal income tax, expired on January 1, 2026, though it can still apply to debt forgiven under a written agreement entered into before that date. Legislation to restore the exclusion has been introduced in the 119th Congress but is not law as of August 2026.
The insolvency exclusion and the bankruptcy discharge exclusion remain permanent features of the tax code and cover many homeowners in this position. IRS Publication 4681 explains the federal tax treatment of canceled debts, foreclosures, repossessions, and abandonments.
Mohebbi Realty Group is not a tax advisor. Any homeowner considering a short sale, modification, or deed in lieu in 2026 should obtain written guidance from a CPA before signing, because the difference can be substantial.
Which Houston-area communities see this most often?
Negative equity in Greater Houston concentrates in areas with active new-home construction, because a resale home competes directly with a builder who can offer rate buydowns and incentives on comparable inventory.
Cinco Ranch, Katy and Cane Island, Katy — established sections resell steadily, but homes purchased at peak pricing with minimal down payment can price close to break-even after costs.
Elyson, Katy and Cross Creek Ranch, Fulshear — actively building communities where resale listings sit alongside new builder inventory.
Bridgeland, Cypress and Towne Lake, Cypress — large master-planned communities with long build-out horizons.
Harvest Green, Aliana, and Candela in Richmond — MUD district tax rates affect the monthly payment and should be modeled into any hold-versus-sell analysis.
Pricing, inventory, and builder incentives vary by section and by month. A community-level analysis is more useful than a citywide median when the decision hinges on a few thousand dollars.
Why Mohebbi Realty Group
Mohebbi Realty Group works with homeowners across Katy, Fulshear, Cypress, Richmond, Sugar Land, and Greater Houston, with relationships across more than 40 homebuilders that inform how we price resale homes competing against new construction. Bobby Mohebbi holds the Short Sales and Foreclosure Resource (SFR), Pricing Strategy Advisor (PSA), Accredited Buyer Representative (ABR), and Veterans Certified Agent (VA) designations, and ranks in the top 1.5% of agents nationwide per RealTrends. We provide the market analysis, the net-proceeds math, and the listing execution — and we tell homeowners plainly when the right answer is to keep the house rather than sell it.
Related resources: Foreclosure Services · Free Home Valuation · Net Proceeds Calculator · Your Home SOLD · Katy, TX Area Guide
Frequently Asked Questions
Can I sell my house if I owe more than it is worth? Yes. A homeowner can sell an underwater property either by bringing cash to closing to cover the shortfall or by negotiating a short sale in which the lender accepts less than the full payoff. Bringing cash keeps credit intact and closes on a normal timeline. A short sale requires lender approval and typically adds 60 to 120 days after a contract is accepted.
Does a short sale hurt your credit as much as a foreclosure? A short sale generally causes less credit damage than a foreclosure and typically carries a shorter waiting period before a homeowner can finance another purchase. Actual credit impact depends on how many payments were missed beforehand and how the lender reports the settled account. Waiting periods vary by loan program, so a lender should confirm timelines in writing.
How long does it take to get back above water on a mortgage? It depends on the size of the gap, the loan's amortization stage, and local price movement. In Greater Houston, where HAR reported a median single-family price of $340,000 in July 2026, up 0.6% year over year, homeowners are currently closing the gap primarily through principal paydown rather than appreciation. A typical 30-year loan in year four retires roughly $500 to $650 of principal monthly, and that amount increases every month.
Can you refinance an underwater mortgage in Texas? Sometimes. Conventional rate-and-term refinances generally require equity, but the FHA Streamline Refinance and the VA Interest Rate Reduction Refinance Loan are designed to lower the rate and frequently do not require a new appraisal, which can make them available to underwater borrowers. Eligibility depends on loan type, payment history, and seasoning requirements. Only a licensed mortgage lender can confirm qualification.
Do I owe taxes on forgiven mortgage debt in 2026? Possibly. The federal Qualified Principal Residence Indebtedness exclusion expired on January 1, 2026, so forgiven mortgage debt is no longer automatically excluded from federal taxable income, though written agreements entered into before that date may still qualify. The insolvency and bankruptcy exclusions remain available. Homeowners should consult a CPA before completing any transaction that forgives debt.
Ready to find out where you actually stand?
Call or text Mohebbi Realty Group at (832) 455-3565. We will pull real comparable sales for your street, help you request a current payoff quote from your servicer, and run the net proceeds so you are working from a real number instead of an automated estimate.
If a hardship is already underway, start at our Foreclosure Services page, or run your figures with the Net Proceeds Calculator and request a free Home Valuation.
Required Disclosures
Mohebbi Realty Group is a real estate team brokered by Keller Williams Signature. Bobby Mohebbi is a licensed Texas real estate sales agent, TREC License #[INSERT LICENSE NUMBER]. Brokerage: [INSERT LEGAL BROKER NAME AS REGISTERED WITH TREC], TREC Broker License #[INSERT].
Texas Real Estate Commission required notices: Information About Brokerage Services (IABS) · TREC Consumer Protection Notice
This article is general information about real estate market conditions and is not legal, tax, financial, credit, or accounting advice. Mohebbi Realty Group does not provide loan modification services, credit repair services, debt settlement services, or foreclosure rescue services, and does not negotiate on behalf of homeowners with lenders. Homeowners facing hardship should consult a licensed Texas attorney, a certified public accountant, their mortgage servicer, and a HUD-approved housing counseling agency. Individual results vary and no outcome is guaranteed. Market figures cited are as of August 2026 and change over time.
Equal Housing Opportunity. Mohebbi Realty Group complies with the federal Fair Housing Act and the Texas Fair Housing Act. We provide equal professional service to all persons without regard to race, color, religion, sex, disability, familial status, national origin, sexual orientation, or gender identity.