what does underwater mean 
 underwater is the term for a financial contract or asset that is worth less than its notional value more commonly though the term is used in relation to a house or another substantial asset which has an outstanding mortgage or loan on the asset that is a larger amount than what the asset is worth in either case the holder has an asset without intrinsic value in the case of the mortgage or loan the holder of the asset actually owes more than the asset is worth underwater is sometimes also referred to as upside down understanding underwateran asset is underwater if the price paid for it is more than its current market valuation broadly speaking any paper unrealized loss relates to an underwater asset more commonly underwater relates to leverage or borrowing where it means owning an asset that is worth less than an outstanding loan on that asset in securities trading this could happen in a margin account where a trader owns a stock on leverage but the company stock declares bankruptcy and the stock holdings no longer cover the margin or loan the broker provided to buy the stock initially the account is underwater and the investor will need to find funds somewhere else to pay back the money loan they lost in the stock market this is known as a margin call such a situation can also occur with a non financial asset if a new car is purchased with a loan the purchase almost immediately results in the buyer being underwater because the car will depreciate immediately once it is driven off the lot while the loan will be paid down slowly over years eventually as more payments are made and the car depreciates at a slower rate the car will be back above water for example in 10 years the loan is paid off but the owner can probably sell the car for a few thousand dollars depending on the make and condition of the vehicle special considerationsbeing underwater on a loan isn t always a horrible thing as long as payments are made the loan is paid down and the underwater situation may end up being temporary that said underwater situations can be mostly avoided by looking for a margin of safety in regards to the asset being purchased and the loan amount getting a good deal on a house or car where the value of the asset could be sold for more than what is paid given some time will mean the loan amount is smaller and there is a larger buffer between the asset s value and the loan amount this means the asset would need to fall in value more in order to be underwater compare that to a couple that overpays for a house paying 300 000 in a bidding war for a house that is really only worth 280 000 depending on how much they put down they could be underwater immediately or if housing prices fall they could be underwater substantially in a short amount of time missing payments or incurring additional fees for violating the terms of the loan can increase the loan amount owing quickly this can cause a loan to move underwater or deeper underwater lenders are often willing to work out solutions with borrowers if the financial struggles are short term as the lender doesn t want to have to go through the struggle of selling an underwater asset to only partially pay back a loan at a loss if dealing with financial problems talk to a financial planner debt counselor and or the lender to help find a solution before the problem gets worse underwater mortgagesin real estate underwater refers to the situation where a house or other property is worth less than the money owed on the loan an underwater mortgage is thus a home loan with a higher principal than the free market value of the home this situation can occur when property values are falling in an underwater mortgage the homeowner may not have any equity available for credit an underwater mortgage can potentially prevent a borrower from refinancing or selling the home unless they have the cash to pay the loss out of pocket this negative value presents problems for both the homeowner and the holder of the mortgage if the homeowner needs to move the sale of the home will not produce sufficient monies to pay the mortgage holder even before any transaction fees in this case the homeowner must find additional funds or enter into a short sale with a third party these types of problems in turn lead to legal battles and possible difficulties down the road for both the original homeowner and the third party lender while a short sale does complicate the process by which the original lender recovers their money a more significant problem with underwater mortgages emerged after the housing bubble in 2006 07 and bust in 2008 09 homeowners owing more than their home s value quietly walked away from their investments this resulted in mortgage defaults leaving the lending banks with losses and the added expenses of liquidating their acquired homes 1underwater mortgages were a common problem among homeowners around the height of the 2008 financial crisis which among other things involved a substantial deflation in housing prices assume a person sees a house they like listed at 400 000 they have 40 000 for a downpayment or 10 not including other fees and mortgage insurance which will mean some of the downpayment won t be going to the principal for simplicity assume that the buyer gets a loan for 360 000 using the mortgage and downpayment the buyer pays for the house several months after the purchase they notice similar houses in their area are selling for substantially less than 400 000 similar homes called comparables are selling for 350 000 the loan value of 360 000 has only dropped incrementally to 359 000 as much of the initial payments go to interest and not principal yet the house is only worth 350 000 if the house was sold it could not pay off the loan this is referred to as being underwater or upside down if the housing market stabilizes eventually the loan will be paid down and the property loan will no longer be underwater being underwater a small amount or for a short period of time isn t a major issue being underwater for a long time and by a large amount indicates a poor purchase poor timing or poor market conditions possibly all three the house could be underwater for a number of reasons possibly the homebuyer overpaid in the first place the house may have only been worth 350 000 all along but the seller asked more and the buyer was willing to pay it alternatively the property value may have dropped 400 000 may have been a good price at the time but a recent downturn in the economy means fewer jobs and not as many people being able to afford their homes forced to sell property values are driven down property values often deteriorate slowly but can move quickly in certain areas for example a small town may see property values plummet very quickly if the main source of employment say a plant or mine closes 