Are you facing imminent foreclosure? There may be a way to avoid it with a deed in lieu of foreclosure.
Thousands of Canadians have a tough time making their mortgage payments in full and on time each month, placing them in a position of default and inching themselves one step closer to foreclosure. Regardless of the reason for defaulting on a mortgage, missing a couple of payments can flag your lender and put you in a risky position to potentially lose your home.
However, a deed in lieu of foreclosure’ in Canada could potentially be a means of avoiding going into full foreclosure. Foreclosure can have a detrimental impact on your credit standing and financial reputation, so it’s best to find a way around it however you can.
Key Points You Should Know About A Deed In Lieu Of Foreclosure In Canada
- A deed in lieu of foreclosure may be a last resort to avoid foreclosure.
- The process involves voluntarily giving up your home to avoid legal troubles.
- While your credit may take a hit, it may not be as severe as a full foreclosure.
- Be sure to consider other options first, such as mortgage refinancing or selling your home, before choosing a deed in lieu of foreclosure.
What Is A Deed In Lieu Of Foreclosure In Canada?
A deed in lieu of foreclosure is a process whereby you agree to voluntarily hand over the deed to your home to the lender instead of going through the long and stressful process of foreclosure. You will still need to vacate your home, as you would have to if the property was foreclosed.
The lender can then sell the home without having to involve the courts to get you to leave. By conveying your home’s title to the lender, you’ll be able to satisfy the mortgage that’s in default and avoid any painful and damaging foreclosure proceedings.
How Does A Deed In Lieu Of Foreclosure Work?
The process of completing a deed in lieu of foreclosure varies a little from one lender to the next. It usually starts with the homeowner falling behind on their mortgage payments, after which they and the lender negotiate a deal whereby the homeowner vacates the property, leaving it in good condition. All rights to the home are then signed over to the lender.
The homeowner will likely be required to provide proof of income and other financial information. They’ll also need proof to support that the property hasn’t or can’t be sold for what is still owing on the mortgage when attempting to sell at fair market value. Once the homeowner signs the deed in lieu documents, the process is completed.
It should be noted that the lender does not have to accept this deal. You and the lender must come to an agreement. The lender can reject a deed in lieu of foreclosure if they believe that seizing the property is not worth the trouble.
What Are The Benefits Of A Deed In Lieu Of Foreclosure Over Foreclosure?
There are a handful of reasons why a deed in lieu of foreclosure may be worth considering:
Part Of Your Loan May Be Forgiven
As part of the deed in lieu of foreclosure process, your lender will forgive any part of the mortgage they don’t get back after selling the home. In the case of a full foreclosure, the bank could sue you for any amount not recouped if the home sells for less than what you owed them. In this case, a deed in lieu of foreclosure can help you avoid an ugly lawsuit.
Less Damage To Your Credit Score
This process is also less harmful to your credit rating than a full foreclosure. Your credit score might still take a hit. However, it may not be as much as it would be with a full foreclosure. Repairing your credit can take a long time, often up to 7 years.
Potential To Buy Another Home Sooner
After a formal foreclosure, you’ll find it difficult to get approved for other types of loans, credit cards, an apartment lease, or another mortgage. A deed in lieu of foreclosure will stay on your credit report for seven years, but you should still be able to buy a home two or three years after you complete your deed in lieu of foreclosure.
Faster Process
Perhaps the biggest benefit of a deed in lieu of foreclosure is that it closes out your mortgage right away. As such, you’ll have saved the hassle of going through the full foreclosure process. Not only that, you could potentially be offered better terms compared to formal foreclosure.
Beneficial For The Lender
A deed in lieu of foreclosure is not just beneficial for you, but also for the lender. From their perspective, lenders view a deed in lieu of foreclosure as a better alternative to foreclosure because it can save them time, hassle, and money. It also protects them should you be one of the few cases where the homeowner of a foreclosed home vandalizes the property before vacating it.
What Can Stand In The Way Of A Deed In Lieu Of Foreclosure?
While there are certainly some advantages to a deed in lieu of foreclosure over a full foreclosure, there could be times when this process is not possible:
Multiple Loans On The Property
If there are several loans on the property, a deed in lieu of foreclosure may not be an option. In this case, the other lender will probably not agree to this process because they will almost certainly lose out on any money owed to them.
Low Property Value
If the value of the home has gone down or the outstanding debts on the property are too high, the lender may not agree to a deed in lieu of foreclosure. They would likely lose part of their investment.
Liens Or Judgments On The Title
Lenders typically don’t accept a deed in lieu of foreclosure if the property has any legal action associated with it. In cases where a lien or judgment is on the title, the lender might be better off initiating a foreclosure.
Lenders Don’t Have To Accept The Deed In Lieu Of Foreclosure
As previously mentioned, an agreement must be made between you and the lender. If the lender does not believe that taking back the property is in their best interests, they have the right to turn down the deed in lieu of foreclosure.
What Can You Do To Avoid Foreclosure?
If you’re having trouble keeping up with your mortgage, consider the following options to potentially avoid foreclosure:
Talk To Your Lender
You need to take action right after the first missed payment. One of your best options is to contact your lender right away. You might be able to work something out with your lender that will help you curb the foreclosure process.
Often, lenders will be open to working with you to avoid foreclosure, as this process is also time-consuming and burdensome for them. For instance, they may be willing to restructure your loan to make it more financially feasible for you to cover your mortgage payments.
Reach Out To A Credit Counsellor
If you can’t agree with your lender, consider speaking to a credit counsellor. These entities offer many services, including one-on-one counselling and debt management programs to help you open up more funds to pay off your mortgage without defaulting. There are both non-profit and for-profit organizations available that offer credit counselling services.
It’s important to make sure that you look into the credit counselling company that you’re considering working with to see if they are qualified and trustworthy. In addition, find out if there is a cost associated with these services, and if so, how much.
When Does A Deed In Lieu Of Foreclosure Make Sense?
Choosing a deed in lieu of foreclosure in Canada should only be done as a last resort. If you haven’t missed a mortgage payment and have a chance to refinance your mortgage, defer mortgage payments, modify your existing mortgage, or even sell your home, consider these options first. However, there are situations where a deed in lieu of foreclosure might make sense:
- You’ve already missed mortgage payments
- You expect to fall behind on your mortgage payments very soon
- You’re dealing with long-term financial troubles
- You have negative equity in your home (ie. you owe more on your mortgage than what your home is worth)
- You don’t want to sell your home just yet
The Bottom Line
Foreclosure is a harrowing experience for homeowners, as well as for lenders. As such, finding an alternative to this process can save time and stress. A deed in lieu of foreclosure in Canada can leave you in a slightly better position than going through the full foreclosure process. While you’ll still have to hand your home over to the bank, you’ll be left in a better position to become a homeowner again in a shorter amount of time.
