Finance
The term 'underwater' or 'upside down' on a mortgage means:
AThe property has flooding issues
BThe loan balance exceeds the property's current market value✓ Correct
CThe borrower's debt-to-income ratio is too high
DThe interest rate exceeds the cap rate
Explanation
A borrower is 'underwater' when they owe more on their mortgage than the property is currently worth. This can occur when property values decline after purchase and prevents the borrower from selling without a loss or short sale.
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Key Terms to Know
Short Sale
A sale of real property where the sale proceeds are less than the outstanding mortgage balance, requiring lender approval.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
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