Define: Negative Equity

Negative equity in law refers to a financial situation where the value of an asset, typically a property such as a home or a vehicle, is worth less than the outstanding balance of the loan or mortgage secured against it. In the context of real estate, negative equity occurs when the market value of a property decreases below the outstanding mortgage balance owed by the homeowner. This situation can arise due to factors such as declining property values, economic downturns, or high loan-to-value ratios. Negative equity can have significant financial implications for borrowers, as they may find themselves unable to sell the property for enough money to cover the remaining debt, leading to potential financial loss or foreclosure. In some jurisdictions, laws and regulations may govern how lenders and borrowers handle negative equity situations, including options for loan modification, refinancing, or foreclosure alternatives. Additionally, government programs or assistance may be available to help homeowners facing negative equity mitigate their financial hardships and stabilize their housing situations.

In real estate, negative equity describes a situation where the debt on a real property exceeds the assumed value of the property. With negative equity, the proceeds of a sale may not satisfy the mortgage. Negative equity thus increases the probability of borrower default. Historically, the most common cause of negative equity was a decline in property values. Excessive borrowing is another independent cause of negative equity. Some loan products are dangerous for the borrower by potentially facilitating negative equity. For example, a negative amortization mortgage may allow for monthly payments that do not even cover the interest on the principal, with the difference being capitalized or added to the principal balance. If equity is already zero, the increase in principal creates negative equity. In practice, many banks will notify the borrower once the loan balance exceeds 110% of the original appraised value of the property, but by then negative equity may or may not exist.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 29th March, 2024.