If COVID-19 has taught us anything, it’s that sometimes life can be unpredictable. No matter how much we try and prepare, even the best-laid plans can get trampled when life gets in the way. When you buy a home, you have big dreams for all the projects you’ll take on and how you’ll make the space your own. You envision spending holidays together in your space and making memories to last a lifetime. But you definitely don’t envision missing your mortgage payments or running into financial issues that could jeopardize your ability to make payments on time. Regardless of your current situation, as a homeowner it’s always good to be prepared by learning about your options should things take an unexpected turn with your finances.
What Is Foreclosure?
Sometimes making mortgage payments on time and in full can be difficult. Facing an unexpected illness or disability, losing your job, having your wages reduced or even dealing with a divorce can all have an impact on your ability to make mortgage payments. After a while of not making your payments, when things become too far gone, your mortgage will fall into a state of default, which means as a homeowner, you have to forfeit all rights to the home. This is known as a foreclosure. Since a foreclosure isn’t in the best interest of the lender or the borrower, it’s important to communicate your hardship with your lender and try and resolve the issue as soon as you know a payment could be missed.
How Mortgage Foreclosures Work
Depending on where you live in Canada, you’ll be looking at three options when faced with a foreclosure. It’s important to note that while you won’t be the one deciding which option to choose, it’s wise to understand your options so you have a better idea of what comes next, should you find yourself facing a foreclosure.
You’re probably quite familiar with the term “filing for bankruptcy,” but you may not know much about what this process entails and how it affects your future. While it isn’t easy or simple, it may be the right fit, depending on your personal situation. When you file for bankruptcy, your debts get erased, which, in turn, improves your cashflow and gives you the opportunity to catch up on missed mortgage payments. If making these payments is still unmanageable after eliminating all other debts, you may be forced to sell your home anyway. If the sale doesn’t bring in enough to cover the amount that’s owed, any shortfall can be included in the bankruptcy, which would allow you to walk away without any further financial strain.
Power Of Sale
Power of sale is the lender’s first choice in Ontario, New Brunswick, Newfoundland and Labrador and Prince Edward Island. It’s the most common type of foreclosure in Canada and the preferred process for Ontario. Power of sale is a process that requires less legal involvement and more cooperation. When you’re facing foreclosure, this option gives you the possibility of keeping your home, but it won’t be cheap!
If you’ve defaulted on your mortgage payment for longer than 15 days, your lender has the right to send you a notice of sale or notice of sale under mortgage, which is the first step in the power of sale process. If you find yourself looking at one of these notices, your first step is to call your lender as soon as possible to see if you can negotiate to pay what you owe before the process actually begins (typically 35 days). If you’re able to connect with your lender and pay what you owe in time, you can keep your home and put this all behind you (hopefully with a better reminder system and plan for future payments). If you’re unable to catch up within the given time period, your lender will issue an eviction notice and will have the right to sell your home in order to repay the outstanding loan. If there’s any money left afterward, it gets returned to the borrower. If the opposite occurs and there isn’t enough money from the sale to cover what’s owed, the lender can actually sue the borrower to recoup the remaining balance.
In case the name didn’t quite give it away, this process relies heavily on the court system, and as a result, tends to be drawn out a lot longer than a power of sale (6-12 months typically). This is the preferred method in BC, Alberta, Manitoba, Saskatchewan, Quebec and Nova Scotia. A judicial foreclosure is a process where the lender files a statement of claim with the court, aka a lawsuit. This gets served to the homeowner who is then given a specific period of time in which to reply. If it’s not possible to find a resolution, the property gets transferred to the lender and can be sold under court supervision. Unlike a power of sale, the borrower relinquishes all rights to any capital gains that may result from the sale of the home once the amount that’s owed is repaid.
What To Do If You’re Behind On Your Mortgage
If you’re starting to worry about making payments on time or you foresee an issue with cashflow in the short term, there are a few things you can do to lessen the blow:
While many people took this route during the pandemic as they lost their cash flow and found themselves in a not-so-ideal financial situation, mortgage lenders have been offering short-term deferrals (or mortgage extensions) in extenuating circumstances for decades. Have the conversation with your lender about putting your payments on hold temporarily if you’re suddenly worried about making your payments on time.
Finding A New Lender
If your lender isn’t open to negotiating to help you, it may be time to consider moving your mortgage elsewhere. Find out what that process would entail and look into your other options to ensure you’re comparing apples to apples and taking into consideration any additional fees you may encounter as a result of your decision.
Selling Your Home
If you think the sale of your home is likely to produce more cash than what you owe the bank, it may be wise to consider selling your home before the bank has a chance to foreclose. This would mean that any money left over once you’ve paid what you owe, would go directly into your pockets, and not someone else’s.
If your struggle to pay mortgage payments stems directly from your inability to manage other debt, you may want to consider filing for bankruptcy (or consumer proposal) before you immediately choose foreclosure. This process can help you get a better hold on your finances overall and could make homeownership a lot easier.
Renegotiation Of Your Mortgage
Depending on your chosen mortgage amortization period, your lender might be willing to extend it and modify your loan accordingly. The longer you stretch the mortgage out, the lower your monthly mortgage payments become, so this simple adjustment could be enough to help keep you on track without taking any drastic action.
Facing a foreclosure can be very scary, especially if you aren’t informed about your options and don’t understand the process. The more you know in advance, the better suited you are to make the best decision for your personal situation. Stay on top of your payments, keep an eye on your budget and reach out for help if you start having issues with your finances. Want to learn more about your options? Need to seek out professional guidance? The team at Edison Financial can help!