An Underwater Mortgage is a home purchase loan with a higher balance than the free-market value of the home. This situation often prevents the homeowner from selling the home unless the homeowner has the cash to pay the loss out of pocket.
It also prevents refinancing in most cases. Thus, if the homeowner wants to sell the home because they can’t afford the mortgage payments anymore, the home may fall into foreclosure unless the borrower is able to find a way to payoff or renegotiate the loan.
Underwater mortgages became commonplace in the aftermath of the 2000s housing bubble burst, and, combined with a bad economy, resulted in numerous foreclosures.
In nonrecourse states, where mortgage lenders can’t pursue borrowers for more money once their homes have foreclosed, many borrowers who could still afford their mortgage and other bill payments strategically defaulted on their underwater mortgages because they believed they were cutting the losses from a bad investment.