The fact that a mortgage balance can exceed a property's value remains confusing to many of us. You know that the lender did evaluate the property when you initially obtained a mortgage and find it hard to believe that a lender would finance your home for more than what it is worth. Unfavorable market events can influence the property's value and cause a negative impact. This scenario usually results from recent home sales in the same neighborhood, falling of home prices and unwise decisions regarding your mortgage.
RECENT HOME SALES IN THE NEIGHBORHOOD HAVE AN IMPACT ON YOUR PROPERTY'S VALUE:
Fair Market Value is an estimated value subjective to factors, such as comparable prices, market conditions and availability of finance. Lenders typically request a valuation of the home and analyses' sales for the last six months of similar homes in the same area. This information is used to determine the property's value. Foreclosures and short sales tend to have the worst impact on property values. The property's value will decrease if the value to your home is $220,000 and three comparable properties in your area sold for $150,000. If your mortgage balance is $190,000, it means that the mortgage balance exceeds the property value. If a buyer is willing to pay the asked priced, a lender will not finance the full amount.
FALLING OF HOME PRICES:
According to some economists, home prices are expected to drop further during 2013. Falling home prices can result into a substantial negative difference between a high-value mortgage and the property price. It is important to know that fair market value, with the impact of falling prices, differs from the seller's value.
MAKING BAD FINANCIAL DECISIONS:
A mortgage can also exceed the property's value if a homeowner made bad financial decisions. Homeowners can obtain a second or third mortgage on their home. This is possible if home prices are high, and the current mortgage balance is relatively low. For example, if the property's value is $220,000, the mortgage balance is $120,000, and you possess affordability, you qualify for a second mortgage of approximately $100,000. What if home prices drop significantly after you obtained the second mortgage? The mortgage balance will exceed the property's value.
It is quite possible to end up in a situation where the mortgage balance exceeds the property's value. This situation of the homeowner is referred to as "underwater." The situation worsens if the homeowner has to sell. It is also possible that the mortgage installments are no longer affordable due to high medical expenses, a divorce or maybe a job loss. A homeowner is often forced to enter a short sale, which negatively impact comparable prices. This situation is to the disadvantage of other homeowners in the same neighborhood.