What does the term "underwater" mean in real estate?

The term "underwater" in real estate specifically refers to a situation where a homeowner owes more on their mortgage than the property's current market value. This typically occurs when property values decline, leaving the homeowner in a negative equity position. In such cases, if the homeowner were to sell the property, the sale proceeds would not cover the existing mortgage balance, thereby placing them "underwater" on the loan.

This situation is critical for lenders and borrowers alike, as it can lead to financial distress, making it harder for the homeowner to refinance or sell the property without incurring a loss. Understanding the concept of being underwater is essential for mortgage loan originators, especially when advising clients about risks associated with home investment and mortgage obligations.