Negative equity occurs when

• A. The loan balance is less than property value
• B. The property value equals loan balance
• C. The loan balance exceeds the property value
• D. The mortgage is fully paid

Answer: (C)

Negative equity happens when the amount you owe on a property is larger than what the property is worth in the market. Equity is the difference between the property's current value and the outstanding loan balance. If the loan balance exceeds the property's value, that difference is negative.

For example, if a house is worth 200,000 but you owe 180,000, you still have positive equity of 20,000. If the value drops to 150,000 while the loan remains 180,000, you have negative equity of 30,000, meaning you’d owe more than the house would fetch if you sold.

The other situations—loan balance being less than value (positive equity), loan balance equal to value (zero equity), or the mortgage being fully paid (no loan but no deficiency)—do not describe negative equity.