Will going underwater on your mortgage lead to foreclosure?

On Behalf of | Dec 5, 2022 | Real Estate

Real estate markets can be volatile and react to everything from natural disasters to local industry development. How much a property is worth at any given time is essentially a reflection of what other people would willingly pay for it.

Sometimes, homeowners purchase their property when the markets are competitive and prices are high. They then find themselves in an unfavorable financial situation. They technically owe more on their mortgage than the property is worth when prices start to drop. If they were to sell the property in the near future, they would lose money on the transaction.

Being underwater on your mortgage is a stressful experience. Do you have to worry about foreclosure because of your situation with your mortgage?

Foreclosure won’t automatically follow changes in value

The home where you  live is the collateral property for your loan. So long as you remain in compliance with the terms of your loan, the property won’t be at risk. Your lender can only foreclose on a property when they haven’t received payments from you as agreed upon in the mortgage.

Provided that you continue making payments despite realizing that the property is currently not worth the principal balance owed on the mortgage, foreclosure won’t be a concern for your household. If anything, mortgage companies would want to avoid foreclosure when the market is unfavorable, as they would recoup less of what they provided for the purchase of the property.

Although it can be disheartening to realize that you owe more on your mortgage than other people would currently pay for your home, large investments require a long-term perspective. If you continue living in your home and making mortgage payments, eventually you will pay down the principal to a point where listing your property will allow you to not only repay what you owe but also to have funds for the next home that you purchase.

Going underwater on your mortgage is a frightening experience for some people, but it doesn’t necessarily put your homeownership at risk. For those who have fallen behind on payments, there could be several options available. Lenders may be more likely to cooperate in loan modification requests when foreclosure would mean a financial loss. They may also be more cooperative with individuals who file for personal bankruptcy.

Learning more about your options when you believe you may have trouble with your mortgage can help you protect your interests in your home.