An “underwater” mortgage is when the balance of the mortgage loan is higher than the fair market value of the property. This type of situation became common following the housing market crash that occurred in the late 2000s when many homeowners saw their homes lose a considerable portion of their value.
Let's say your mortgage is $500,000 but the market value of your home is only $475,000. Your mortgage is $25,000 more than the value of your home. In this case, your mortgage is underwater.
Underwater mortgages can pose problems in several situations.
An underwater mortgage makes it difficult for homeowners to sell their house. Buyers generally will only pay market value for a home, but if the property is underwater, the sale price won’t be enough to pay off the mortgage debt. This situation makes it difficult, if not impossible, to sell a property that is underwater.
An underwater mortgage also often prevents a homeowner from being able to refinance the debt. Underwater homeowners are typically unable to get a new loan with more favorable terms—like a lower interest rate—if the current value of the property is not enough to act as security for a new loan that is sufficient to pay off the existing mortgage.
If a homeowner needs to sell the home or refinance because the monthly payments are too high, but can't do so, there's a high risk that the home will go into foreclosure. (To learn more about how foreclosure works in your state, see Nolo's Key Aspects of State Foreclosure Law: 50-State Chart or check out your state's page in our State Foreclosure Laws area.)
If you're facing a foreclosure and need more information about how to the process works where you live or want advice about what to do in your particular situation, consider contacting a foreclosure lawyer. If you need information about different ways to avoid a foreclosure, like with a loan modification, short sale, or deed in lieu of foreclosure, consider talking to a HUD-approved housing counselor.