Underwater properties were common during the height of the 2008 financial crisis when there was a deflation of housing prices. This deflation was caused primarily by low lending standards that resulted in a high number of foreclosures.
Also called “negative equity,” an underwater property is when a homeowner owes more on the property than what it is worth. For example, if a homeowner bought their home with a loan of $200,000 and their home is now worth $150,000, they will owe the difference of $50,000.
While the market has improved since then, underwater properties can still happen.
Underwater Properties Happen For Several Reasons
Owners can become underwater if:
- They make late payments
- Took out a zero down mortgage
- Real estate values drop
Real estate values can drop if neighbors in the community foreclose, and the home is never resold. This results in what is known as “zombie houses” and drives down property values.
If a homeowner took out a zero down mortgage, the risk of becoming underwater happens when home values do not appreciate as expected.
Underwater Properties Can Make Refinancing Difficult
Homeowners wanting to refinance their homes when they are underwater traditionally will find it challenging to do so. Thankfully, there are programs available that homeowners may be eligible for when their property is underwater:
- Home Affordable Refinance Program (HARP)
- Home Affordable Modification Program (HAMP)
- Principal Reduction Alternative (PRA)
Sellers Will Owe The Difference
Selling the property? Sellers will owe the difference as they will not make enough to pay off what they own on their home loan. They can get their lender’s approval to go through with a short sale and sell for less than what the home is worth.