A Tenth of Recent Home Buyers Are Underwater on Mortgages (2024)

FAQs

A Tenth of Recent Home Buyers Are Underwater on Mortgages? ›

Last year, more than 10% of recent homebuyers had properties that were worth less than what they owed. Stiff competition for limited inventory and elevated mortgage rates contributed to that.

The share of "seriously underwater" mortgages — defined as having a balance that's 25% more than the fair market value of the house — edged up from 2.6% to 2.7% nationally in early 2024. That translates to roughly one out of every in 37 homes, the real estate firm said in a report on Wednesday.

What does it mean when economists say that home buyers are "underwater" on their mortgages? Buyers owe more on their mortgage than the properties are worth.

An underwater mortgage, sometimes called an upside-down mortgage, is a home loan with a higher principal than the home is worth. This happens when property values fall but you still need to repay the original balance of your loan. Mortgages aren't the only loans that can end up underwater.

One in 37 homes with mortgages was considered seriously underwater during the first quarter, according to real estate data provider ATTOM's 2024 U.S. Home Equity & Underwater Report. That's up from one in 38 homes during the fourth quarter of last year.

Another option is to simply walk away from the mortgage — a move called a “strategic default” — but, like a short sale or foreclosure, doing so can be damaging to your future homeownership prospects and credit score. In short, this option also puts you in a precarious financial situation.

States with the largest shares of seriously underwater mortgages were Louisiana (11.3%) and Wyoming (8.8%), followed by Kentucky, Mississippi and Oklahoma.

If you absolutely need to sell your home when you're underwater, you might be able to convince your lender to approve a short sale. In a short sale, your mortgage lender agrees to let you sell your home for less than what you owe.

If your mortgage is underwater, refinancing may be difficult because you have negative equity. Most lenders want you to have some equity before refinancing because if you default on the mortgage, the lender has a better chance at selling the home without taking a loss.

Recessions put many people in difficult financial circ*mstances, meaning they are less able to afford a new home and more likely to wait it out until conditions improve. This decreased demand means less competition for homes on the market, which in turn means sellers who are more open to lowering their prices.

What if I inherit a house with an underwater mortgage? ›

So, to begin with, the underwater house passes to the decedent's estate, and then whether there's a will involved or not, let's say you're the one (or one of the ones) who's slated to inherit the house. Because the house secures the mortgage, if you decide to keep the house, you will assume the mortgage.

First, find your loan balance on your most recent loan statement. Then check your home value by using online estimate tools or ordering a professional appraisal. Your mortgage is underwater if the loan balance exceeds your home value.

Even if the value of the home declines to the point that the reverse mortgage is well underwater, the lender is not allowed to cancel or reduce any proceeds that you have yet to receive. Only if you breach the terms of the contract can the lender freeze the payout of any unclaimed proceeds.

Lenders call this the “front-end” ratio. In other words, if your monthly gross income is $10,000 or $120,000 annually, your mortgage payment should be $2,800 or less. Lenders usually require housing expenses plus long-term debt to less than or equal to 33% or 36% of monthly gross income.

Backed by the federal government, Federal Housing Administration loans offer financing assistance to homebuyers with lower credit scores or smaller down payments. Most borrowers need a DTI of 43% or less to qualify for an FHA loan.

A good rule is that a 1% increase in interest rates will equal 10% less you are able to borrow but still keep your same monthly payment.

Long-term fixed-rate mortgages tend to predominate in the U.S., France and Germany, while variable-rate and short-term fixed-rate mortgages are common in Australia, the U.K. and other European countries. The Canadian market, dominated by five-year, fixed-rate mortgages, falls somewhere in between.

About 40% of U.S. households have mortgages, of which 92% have fixed rates and the remaining 8% have adjustable rates.

The historical average for the seasonally adjusted mortgage delinquency rate from 1979 through 2023 is 5.25 percent. Of particular note, FHA delinquencies were up 131 basis points. The percentage of loans on which foreclosure actions were started in the fourth quarter remained unchanged at 0.14 percent.

The overall government-backed share of such home purchase loans, including FHA, VA, Rural Housing Service, and Farm Service Agency loans, was 28.1 percent in 2022, down from 29.3 percent in 2021.