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When you take out a mortgage to finance a home purchase, you’re making a promise to your lender that you’ll make regular payments until the full loan amount is repaid. But what happens if you fail to make those payments?
According to the Canadian Bankers Association, over 10,000 mortgages out of nearly 5 million are in arrears, as of April 30, 2021. That’s about one-fifth of 1 percent, and while that may not sound like a lot, it’s certainly a heavy burden for those particular homeowners to have to carry.
Unfortunately, a slew of missed mortgage payments can result in foreclosure, which can leave homeowners without their home. Let’s find out more about foreclosures in Canada and how to avoid them.
Why Your Bank May Foreclose Your Home
When you take out a mortgage on your home, your lender will put a lien on the title which entitles them to repossess the property if you are unable to repay the loan you took out to finance it.
If you fail to make your mortgage payments, the bank that you took out your mortgage with can take back the property. They can then sell it in order to recoup the funds they loaned out to you that you’re unable to pay back.
Your home serves as collateral for the mortgage you take out, which means the home can be repossessed if you fail to uphold your end of the bargain by not making your mortgage payments.
This is why lenders typically require borrowers to have good credentials before they are approved for a mortgage. Borrowers with a stronger financial and credit profile will be seen as less of a risk in the eyes of the lender. Further, a higher down payment means a lower loan amount will be required, which also reduces the risk of mortgage default, and ultimately, foreclosure.
But in the event that you are not able to keep up with your mortgage payments, your lender may have no recourse but to take back the home and evict you by starting the foreclosure process.
Mortgage Foreclosure Process In Canada
Being late on a mortgage payment or missing one completely won’t automatically flag your lender to start the foreclosure process. Generally speaking, you’d need to miss a few payments, and your lender would need to wait a certain amount of time after the payments were due before they can evict you from your home.
If you miss a payment or two, it’s important to get in touch with your bank and explain why you were unable to pay. The lender may be open to coming up with some sort of arrangement whereby you eventually repay what you missed, plus interest. They may also work with you to come up with a more feasible payment plan in order for you to be better able to keep up with your mortgage payments and avoid foreclosure.
However, if missed mortgage payments become a habit, the bank may have no option but to start the foreclosure process. The path taken may depend on where you live in Canada.
Power Of Sale
In Ontario, for instance, a power of sale is the more common and preferred process over foreclosure, and it requires less legal involvement. A power of sale allows you to possibly keep your home, though it will cost you. If your mortgage payments are in default for more than 15 days, the bank can send you a notice of sale, which is the first step towards power of sale.
At this point, you may still be able to negotiate with your lender to pay back what you owe in arrears before the power of sale process begins. But if the process has already legally started, this may not be an available option.
That said, before the power of sale can start, the lender must serve you notice and allow for a redemption for a certain amount of time. In Ontario, this redemption period is 37 days, though that number will differ from province to province.
As such, you will have 37 days to pay your outstanding mortgage payments in full and bring your loan back to good standing with the bank. By law, the lender cannot legally continue with any further action against you until the expiration of the notice of sale.
If you bring your mortgage back up to good standing, you may be served with a statement of claim for the debt you still owe after the 37 days have passed. You’ll also be served with notice of possession of your home. You have 20 days to file a statement of defense response.
If the court decides in the lender’s favour, the eviction process can start. You’ll then need to vacate your home, and the lender can auction it off to recoup the funds to pay off the remaining debt. If the home is sold for more than what you still owe on your mortgage, you’ll receive the balance. But if the home sells for less than what you still owe, the lender may still come after you to cover that amount.
In other provinces, foreclosures are more common, such as in BC and Alberta. A foreclosure starts when the lender files a statement of claim to the court, which you will be served a copy of. You have 20 days to respond to the statement.
If you don’t reply, you’ll default your position, giving the court the power to take your home. But if you submit a statement in response, the court may allow you some time to rectify your situation and bring your mortgage back to good standing to avoid foreclosure.
If you ever find yourself in this situation, it’s always best to speak with your lender before the process of power of sale or foreclosure begins. Perhaps you can come up with a plan, such as consolidating your debt.
Check out our list of things you want to see on your mortgage contract.
Do Foreclosures Affect Credit Scores?
Since foreclosures are reported to the credit bureaus, they will negatively affect your credit score. Generally speaking, a note about your foreclosure will remain on your credit report for anywhere between 7 to 10 years. That means you’ll have to wait that long before your credit score is no longer affected by your foreclosure.
With a poor credit score, it will be much more difficult for you to get approved for any loans, as your credit score helps to determine your eligibility for such products.
How To Avoid A Foreclosure
Even if you’re having financial troubles that are making it difficult for you to keep up with your mortgage payments, it’s important to do whatever you can to avoid falling into the foreclosure trap. Consider the following to prevent yourself from losing your home.
Talk To Your Lender
The first thing you should do is set up a chat with your lender to discuss the financial issues you’re having. As mentioned, you may be able to come up with a slightly different plan that will ease your financial woes. If possible, speak with your lender before you miss your first payment if you think you won’t be able to make it. Ask them if there’s anything that can be done to rectify the situation.
If you do miss a few payments, don’t ignore any communications that come from your lender, as this can start the foreclosure process. And if you wait too long, you may be too late to stop the process in its tracks. Instead, talk to your lender and see what can be done. Otherwise, find out what your rights and options are by speaking with a real estate lawyer.
Sell Your Home
If you haven’t yet missed a mortgage payment but believe you likely will based on your current finances, consider selling your home before you find yourself a few months in mortgage arrears. It may not be a pleasant thing to do, but at least you’ll be able to collect the proceeds of the sale and retain your home equity, while avoiding a bad stamp on your credit report. But this option will only be available before you start racking up missed payments.
While not an attractive option, bankruptcy could help you ward off foreclosure, even temporarily. Bankruptcy won’t legally stop foreclosure since it doesn’t deal with secured debt, which is what a mortgage is. But, bankruptcy may help you deal with any other debt issues you may have and improve your cash flow so you’ll have just enough money available to catch up on your mortgage payments.
It should be noted that bankruptcy doesn’t necessarily mean you’ll lose your home, which is a common misconception about the process. While that certainly may be the case in many circumstances, it doesn’t always happen.
As long as you remain up-to-date on your mortgage payments, bankruptcy laws in Canada will protect you. More specifically, mortgage holders cannot cancel your mortgage as a result of you filing for bankruptcy.
What happens if my bank is trying to foreclose my rental property?
Can I sell my property if I find out my bank is trying to foreclose my home?
When should you use a Licensed Insolvency Trustee?
The best way to avoid foreclosing on your home is to make sure you keep up with your mortgage payments. And if you can’t, you may want to get in touch with your lender to make alternate arrangements. Otherwise, you may want to speak with a real estate attorney or Licensed Insolvency Trustee to help minimize the damage caused to your financial and credit health.
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