An underwater mortgage is where a home loan has a higher outstanding mortgage balance than the market value of the property. This usually comes about by a default or failure to make payments on the mortgage. A simple way to think if this is where the borrower has a greater mortgage debt than what the house is worth.
Having an underwater mortgage has several effects on the borrower and their ability to do things with the property. For instance, an underwater mortgage situation may:
- Prevent the borrower/homeowner from selling the property (there may be exceptions if the homeowner has cash or other funds to pay for losses of the sales)
- Prevent the homeowner from obtaining refinancing on the property
- Create other limitations on the borrower’s financial situations
The main concern with an underwater mortgage is that the homeowner may face foreclosure if they cannot make up on payments or if they cannot renegotiate their loan terms.
Underwater mortgage situations do not happen overnight. They usually result from a series of events or a number of factors, such as:
- Changes in economic situations, such as a loss of a job, a new child, or business failures
- Failure to properly estimate future mortgage payments, especially in mortgage loans where the monthly rates increase after a certain period of time
- Changes in market conditions
- Various other factors
In attempts to deal with or anticipate an underwater mortgage situation, some borrowers may go into strategic mortgage default. This is where they purposely skip one or multiple mortgage payments. This is often done with the understanding that the house will eventually go into foreclosure; at this point the borrower may simply be attempting to hold onto whatever funds they still have.
Strategic default is somewhat common in “non-recourse” states. These are states that do not allow lenders to sue borrowers for additional amounts on top of the foreclosure lawsuit. There may be negative consequences associated with strategic default, such as bad credit ratings. Thus, alternative methods for dealing with an underwater mortgage may be preferable, such as trying to renegotiate payment terms.
Underwater mortgages can create some daunting situations. You may wish to hire a real estate attorney in your area if you have any questions or need assistance with an underwater mortgage. A lawyer can give you legal advice on what to do and can research the laws in your state. Also, if you need to attend any court hearings, your lawyer can be present to represent you during the process.