Underwater or Upside-Down Mortgages - Owner Options
An underwater or upside-down mortgage exists when a property is worth less than the mortgage amount. The property is usually a home, but it can be land or any other type of property that is encumbered with a real estate loan or mortgage. Mortgages become underwater or upside-down usually because the value of the property has materially declined due to a housing recession. Mortgages also become upside down because the borrower has fallen behind in making mortgage payments, causing the loan balance to increase due to accrued interest and principal, late fees, taxes, penalties, and collection charges.
When a property owner has an underwater mortgage, it makes it nearly impossible to refinance their loan or sell the property without the lender agreeing to a short sale. A short sale takes place when a lender agrees to permit the owner to sell the property at less than the loan amount while agreeing to accept less than a full payoff. Lenders often agree to a short sale if the economy is substantially depressed as it was during the 2008 great recession.
Property owners that are faced with an underwater mortgage have the following alternatives:
- Continue to make payments, assuming that is an option, until the real estate market improves;
- Offer to sell the property at the reduced value by means of a short sale if the lender agrees;
- Seek a loan modification; and/or
- Do nothing and let the lender foreclose.
Pacific-Realtors.net can assist property owners facing an underwater mortgage sell their property. We have extensive experience with short sales.