What is Negative Equity Or An Upside Down Mortgage?

Real Estate Agent with Trademark Loss Mitigation

upside down mortgageNegative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan.[1] In the United States, assets (particularly real estate, whose loans are mortgages) with negative equity are often referred to as being "underwater", and loans and borrowers with negative equity are said to be "upside down".

In owner-occupied housing market, a fall in the market value of a mortgaged house or condo is the usual cause of negative equity. Negative equity in the owner-occupied market sometimes occurs when the owner obtains second-mortgage home-equity loans, causing the combined loans to exceed the home value. If the borrower defaults, repossession and sale of the property by the lender will not raise enough cash to repay the amount outstanding, and the borrower will both have lost the property and still be in debt.

Negative equity can turn into a curse if something happens unexpectedly that requires that the property be sold. Here is an example.

"I work for a company that is on the decline and decided it was prudent to seek employment in another area. I have accepted a position there but now face a problem. I owe about $20,000 more on my current home than what it can sell for due to declining market values in my area, and I don’t have the assets to make up that difference."

When you sell your house, you must pay off all liens on the house –all mortgages including HELOCs, and any tax or mechanic’s liens. If you don’t retire all existing liens, you can’t convey good title to a buyer, which means you can’t sell.

Negative equity can develop from a decline in local real estate values, as it did in the case of the example above, but that is not the only cause. Home buyers who make no down payment – their loan or loans equal 100% of the purchase price -- have negative equity when they move in. If they had to sell immediately, they could not repay the loans out of the sales proceeds because of the transactions costs. The sales commission alone runs 3-6% of the price.

This is especially troubling when a homeowner defaults or gets behind in their mortgage and needs to sell the property before foreclosure.  Then, the only recourse is a short sale.


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Houston TX, Spring TX short sale specialistThe Trademark Loss Mitigation team is a family owned business and  includes a multi-state network of real estate agents, attorneys, title companies, short sale negotiators, credit repair providers, mortgage providers, inspectors and investors. Together, those professionals act as a NO COST short sale outsourcing solution for Realtors and Homeowners.

Jim McNinch, Certified Distressed Property Expert (CDPE);

Short sale agent, Short sale specialist




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John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service

Jim - Thank you for sharing detailed quality information on what is negative equity or an upside down mortgage.

Feb 25, 2012 08:43 AM #1
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Jim McNinch

Short Sale Specialist, Texas
For No Cost short sale assistace, contact me now!
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