What is 'Underwater Mortgage'
A home purchase loan with a higher balance than the free-market value of the home. This situation prevents the homeowner from selling the home unless s/he has cash to pay the loss out of pocket. It also prevents the homeowner from refinancing in most cases. Thus, if the homeowner wants to sell the home because s/he can't afford the mortgage payments anymore, perhaps because of a job loss, the home will fall into foreclosure unless the borrower is able to renegotiate the loan.
BREAKING DOWN 'Underwater Mortgage'
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.