Underwater Mortgage

What is an Underwater Mortgage?

An underwater mortgage can occur when housing values drop and a homeowner owes more on the outstanding balance of his or her mortgage than the current fair market value for the home. For instance, if an individual purchase a home with a $200,000 mortgage loan and the value of the home drops to $150,000, then the homeowner would be left $50,000 underwater.

An underwater mortgage may not be a very serious situation on its own, since the value of homes can be volatile and may increase or decrease over time. Homeowners may experience problems however when they need to sell a home with an underwater mortgage. Homeowners with underwater mortgages are oftentimes unable to leave their homes since the sale of the home will not be enough to cover the outstanding balance on the mortgage loan.

In the case that a homeowner with an underwater mortgage begins to miss mortgage payments, this can present a very strenuous situation. If the homeowner cannot continue to afford living in his or her home, but also cannot sell the home because he or she owes more than the home is worth, losing the home to foreclosure could become a real possibility. Homeowners are advised to learn about how underwater mortgages work and the best way to avoid them in order to have the best opportunity at preventing foreclosure.

Underwater Mortgage and Foreclosure

In some cases, it may not be possible to recognize underwater mortgage warning signs early enough to take action. Many homeowners were blindsided by the issue after the 2000 era burst of the housing bubble and housing market crash. These factors may contribute to home foreclosure after an underwater mortgage:

  • The fair market housing value for homes begins to drop.
  • Unemployment rates begin to rise and more individuals begin to experience difficult financial situations.
  • With reduced home values, higher rates of unemployment and homeowners unable to sell or afford their homes, foreclosure can often result.

Underwater Mortgage Resolution Options

There may be resolution options available for homeowners with an underwater mortgage to consider. The Federal government offers at least two programs to help homeowners with underwater mortgages to afford their homes.

  1. Home Affordable Refinance Program (HARP) – this program allows homeowners that qualify to refinance their underwater mortgage loans between 105% and 125%. It is important to note though that homeowners cannot qualify if they are approaching foreclosure in anyway. There must be no delinquent payments in the past 12 months, and the mortgage loan must be owned by either Fannie Mae or Freddie Mac.
  2. Home Affordable Modification Program (HAMP) – this program allows homeowners with an underwater mortgage and a few missed mortgage payments to qualify. Homeowners must demonstrate a financial hardship, and their mortgage loans must be owned by either Fannie Mae or Freddie mac in order to qualify. If homeowners qualify, this program works like a loan modification to change the original terms of the mortgage loan. This may be able to lower monthly mortgage payments for up to 60 months to make homes more affordable for homeowners.