What does the term "underwater" refer to in the context of a mortgage?

The term "underwater" refers specifically to a situation where the borrower owes more on the mortgage than the property's current market value. In other words, if a homeowner needs to sell their property, they would not be able to cover the remaining balance of the mortgage with the proceeds from the sale because the home is worth less than the amount borrowed. This condition can occur during economic downturns when property values decrease, leaving homeowners in a financially precarious situation.

Understanding this concept is crucial for both lenders and borrowers, as it affects loan modifications, refinancing options, and the overall financial stability of the borrower. Other options do not accurately describe the condition of being underwater; for instance, having a property worth more than the mortgage is a positive equity situation and does not reflect being underwater. Similarly, overdue mortgage payments or foreclosure situations relate to different financial distress scenarios that do not specifically define the underwater status of a mortgage.