How Military Homeowners Can Navigate Underwater VA Mortgages

For many military families, homeownership represents more than just a place to live. It’s a hard-earned investment built on service, sacrifice and stability. But in today’s housing market, some Veterans may find that their home’s value has depreciated over time.

According to Q2 2025 data from ATTOM, about 2.7% of outstanding mortgages in the U.S. have a balance higher than the current value of the home. For military homeowners, this can be especially stressful when facing the possibility of relocating quickly due to permanent change of station (PCS) orders.

The good news is that VA loans have unique protections and flexible options to help borrowers navigate these challenges and keep homeownership within reach.

What is an Underwater Mortgage?

An underwater mortgage, often called an “upside-down mortgage” or negative equity, happens when the amount you still owe on your home loan is greater than what your home is worth in the current market.

For example, say you bought your home for $250,000 using your VA loan benefit, but a market shift causes the appraised value to drop to $220,000. If you still owe $240,000 on your mortgage, you’re $20,000 “underwater.”

Being underwater doesn’t automatically mean you’re in financial trouble. Many homeowners continue making payments on time and eventually see their equity return as markets rebound. But understanding what’s happening and what your options are is key to protecting your financial future.

What Causes an Underwater Mortgage?

Negative equity on a VA loan can happen for a variety of reasons, even to financially responsible homeowners. Some of the most common causes include:

• Sudden market downturns: Rapid declines in housing prices can leave homeowners owing more than their property is worth, as the value of the home dips below what it was when the home was first purchased.
• Rising interest rates: Higher borrowing costs can cool buyer demand, putting downward pressure on local home values. VA mortgage rates often remain lower than conventional loan options, but broader market shifts can still affect local prices.
• Minimal down payments or overleveraging: While VA loans don’t require a down payment, purchasing a home with no upfront equity leaves you more vulnerable if prices dip.
• Local economic shifts: Job losses, base closures or population changes in certain areas can lower housing demand and values.

Signs Your VA Mortgage is Underwater

Not sure whether your VA mortgage is underwater? Look for these red flags:

1. You can’t refinance because your loan-to-value (LTV) ratio is too high
2. Comparable homes nearby are selling for less than your purchase price
3. An appraisal comes in lower than your outstanding mortgage balance
4. Your LTV ratio exceeds 100%, meaning you owe more than your home is worth

If these sound familiar, it’s worth reviewing your options. A Veterans United VA loan expert can help you understand the next steps and see what relief paths are available.

Why Underwater Mortgages are Bad

Being upside down on your VA mortgage isn’t just a numbers problem: it has real-world financial and emotional consequences.

Selling your home becomes harder when the sale price won’t cover your loan balance, sometimes leaving a short sale or foreclosure as the only options. Negative equity also increases foreclosure risk if unexpected financial hardship hits, making it tougher to exit the loan responsibly.

For many military families, limited mobility is another challenge since an underwater mortgage can complicate moves tied to duty assignments. The emotional toll is also significant; knowing your home has lost value can create stress and uncertainty about long-term plans.

Understanding these challenges is the first step toward finding solutions that protect both your home and your financial future.

3 Options for VA Homeowners With Underwater Mortgages

If you find yourself facing negative equity on a VA loan, you’re not alone or without solutions. Here are three common strategies for military homeowners navigating this challenge:

1. Stay Put and Wait Until the Market Improves

If your budget allows and you don’t need to move soon, one of the simplest options is to continue making your mortgage payments as usual.

By staying the course:

• You avoid the costs and credit impact of a short sale or foreclosure
• Every monthly payment reduces your loan balance and slowly builds equity
• Market conditions may shift in your favor, shrinking your negative equity over time

Housing markets are cyclical, and values can rebound. For homeowners with stable income and no urgent need to relocate, patience can be a low-stress way to weather the storm.

If you’re facing a PCS move, staying put usually isn’t an option. One alternative is renting out your current VA-financed home. If your mortgage rate is lower than current rates, you may be able to cover most or all of your monthly payment with rent. This can give the market time to recover while helping you avoid selling at a loss.

Renting during a PCS move also introduces the use of second-tier entitlement. Depending on your entitlement remaining, you may still purchase a home in your new duty station with little or no down payment.

2. VA Streamline Refinance (IRRRL)

The VA Interest Rate Reduction Refinance Loan (IRRRL), also called a VA Streamline refinance, can be a lifeline for homeowners with little or no equity. It’s designed to simplify refinancing while lowering costs and monthly payments.

Key advantages include:

• No appraisal required in most cases, so you may qualify even if your home is worth less than you owe
• Streamlined approval with limited credit and income documentation
• Opportunity to reduce your monthly payment, lock in a fixed rate or move out of an adjustable-rate mortgage (ARM)
• Minimal upfront costs, since the VA Funding Fee and other expenses can be rolled into the loan

Because of the VA guaranty, lenders can often refinance VA loans even when homeowners are underwater, something not typically possible with many conventional loans. Specific eligibility can vary, so it’s worth speaking with a VA-approved lender to see how the IRRRL could work for you.

3. Loan Modification

If you’re facing financial hardship, a loan modification may help you stay in your home. You work with your loan servicer to adjust the terms of your current mortgage and create a more affordable monthly payment.

Possible modifications include:

• Reducing your interest rate
• Extending your loan term to lower monthly costs
• Rolling missed payments into your loan balance

The VA strongly encourages servicers to work with Veterans to avoid foreclosure, and multiple programs are designed to help borrowers stay in their homes.

Moving Forward With an Underwater VA Loan

An underwater VA loan can feel overwhelming, but you’re not without support. Whether you stay put and ride out the market, explore refinancing or pursue a loan modification, there are clear steps you can take to protect your financial future.

Veterans United is here to help you evaluate your situation, understand your options and find the path forward that best fits your needs.

If you think you may have an underwater mortgage or are wondering how to manage negative equity, reach out to a Veterans United VA loan expert at 855-870-8845 or get started online today.