Calling All REI Veterans-What Happens If Property Goes Underwater

[Justin McElroy]

Hi BP,

There is a lot of talk of a crash or at least a correction being imminent in the near future, so my question is mainly for investors who survived through the 2008 crash, since you've been through it before. That being said, if anyone else has insight here please feel free to add to the conversation!

To give a little bit of background on myself, I am still a newbie. I purchased my first property to "house hack" this past summer. I put 5% down and put a bunch of work into it with an FHA 203K loan. I will eventually move out of this property and will hold it as an investment property. I also want to continue investing and am searching for a BRRRR where I leave no money in the deal with 75% LTV on the refi. As I am thinking into the future and trying to plan things out, I have a couple of questions that are coming up, and I can't seem to find a definitive answer for investment properties.

My question is this, if my property goes under water, but payments are still being made, will the bank 1) ask for an additional down payment? or 2) force foreclosure/short sale?

Also, how does having a property that is underwater, that is still paying for itself, affect my ability to finance more properties when prices are dirt cheap? I would assume they definitely take that account, virtually making it impossible to obtain reasonable financing in the near future, but I don't know this for sure.

Your input is greatly appreciated and if I'm missing any other information feel free to provide additional insight here. I think this would be a great help to not only myself but to this community. And if this is already covered somewhere else, feel free to point me in that direction.

Thanks in advance,

Justin

[Jon Holdman]

For most mortgages having he value fall below the loan balance is not an issue as far as that loan.  It can be an issue if the loan has terms that allow the loan to be called or it has a balloon.

Lenders will look at your tax returns (if available) or use the 75% rule if not (i.e., "net rental income = 75%*rent - PITI") to determine the effect of rentals for qualifying for a new loan. So, even there the value doesn't really come into play.

It does hurt your net worth, and that is a factor for commercial loans.