Many buyers looking for a deal on a home might turn to foreclosed properties to save a few bucks. But while you may be able to find foreclosures that are listed under market value, these types of properties come with inherent risks.
Read on to find out how to buy a foreclosed home in Canada, and whether you should consider these types of homes as a way to get a good deal.
Key Points
- Buying a foreclosed home can be a great way to save money and gain equity quickly with a rehab job.
- Foreclosures require lots of homework and due diligence to protect yourself from a bad investment.
- The buying process is much different when you’re dealing with a foreclosed home compared to traditional property listings.
- Be wary of hidden costs, such as latent problems, which may not be made known until after you take ownership.
How To Find Foreclosed Homes For Sale In Canada?
It’s not easy to find foreclosed homes for sale in Canada, as they’re rare. Here are some ways to find these properties:
- Contact a local realtor. Reach out to a real estate agent in the area who has some experience working with foreclosure listings. Agents are constantly in contact with other professionals within the market and will typically be the first to know when a foreclosure pops up on the market.
- Visit foreclosure websites. Some sites offer a list of foreclosed homes for sale or may ask you to submit a form to access a list of foreclosed homes. You can also filter your search by using the keyword “repossessed” on sites like Centris.ca.
- Check local auctions. Foreclosed homes are often sold in auctions. If they fail to sell at an auction, they may end up on MLS.
Pro tip: Always get help from a real estate agent to assess foreclosure listings to make sure they’re legitimate.
How To Buy A Foreclosed Home
Now that you’re aware of the potential drawbacks and rewards of buying a foreclosure home, let’s talk about how you can secure financing for it. Remember, buying a foreclosed property is more complicated and risky than the average home purchase. So, you must be even more prepared when you apply for your new mortgage.
Take some precautionary measures, such as the following:
Step 1. Get Professional Advice
Sure, the home itself might be listed at a lower price. Then again, who knows what’s really wrong with it? Make sure to seek the counsel of both a financial advisor and a real estate professional to find out if buying a foreclosed home is the best choice for you.
Ask them about all the potential costs and risks involved. Do the benefits of buying a foreclosed home outweigh those of a typical one? If not, it might be better to avoid the purchase altogether.
Step 2. Have The Property Inspected And Appraised
One of the easiest ways to make sure you’re getting a good deal is by having the property inspected and appraised for its current value. While your lender might provide a similar inspection and appraisal, it might be better to pay for your own, just to confirm that you’re not buying a property that will never reach its full potential.
Step 3. Create A Budget
Consider the significant costs involved with buying a foreclosure home. Remember, a foreclosed property might need some work before it’s safe to live in. If you can’t afford these costs (as well as your payments), hold off until you can find a more suitable property.
Consider expenses that are unrelated to the initial price, such as the following:
- Utilities that need to be switched on (water, gas, electricity, heating)
- Changing the locks
- Cleaning and general maintenance
- Renovations (if any)
- Property and land transfer taxes
- Landscaping (if necessary)
- Inspection/appraisal
- New or used appliances and furniture
- Interest rate and administrative fees
- Any titles or permits required (additions, porches, garages, etc.)
- Additional damages that may have occurred between when you last viewed the home and when you actually took possession of it
Step 4. Prepare For The Application Process
While buying at auction is a common way of purchasing a foreclosure property, going with a legitimate real estate company is often a safer method. In either case, however, an approval process is just as necessary as with any conventional mortgage. You have to be prepared for your credit score and finances to be inspected.
Here are a few things you can do to make you appear more creditworthy:
- Update and organize any required personal/financial documents
- Pay down your other outstanding debts
- Improve your credit (report, score, history, rating)
- Increase your income and savings as much as possible
- Offer a sizeable down payment
- Figure out a payment plan that works for your finances
Find The Best Mortgage For Your Needs
| Amount | Rate | Availability | Products | |
 Loans Canada | Varies | Varies | All of Canada | - First mortgage - Refinancing - Renewal - Lender switch - Home equity loans |
 Alpine Credits | $10,000+ | Based on equity | All of Canada except Quebec | - Home equity loans |
 Mortgage Maestro | $10,000+ | 5.19%+ | All of Canada except Quebec | - First mortgage - Refinancing - Renewal - Line of credit (HELOC) - Reverse mortgage |
 Neo Mortage™ | Varies | 5.54%+ | All of Canada except Quebec | - First mortgage - Refinancing - Renewal |
 nesto | $100,000+ | 5.34%+ | All of Canada | - First mortgage - Refinancing - Renewal |
 Homewise | Varies | Varies | BC, AB, MB ON | - First mortgage - Refinancing - Renewal - Lender switch |
 Fairstone | $5,000 $60,000* | 19.99% to 24.49% | All of Canada | - Home equity loans |
Foreclosures in Canada
In Canada, foreclosures are actually rarer than you might think. Some lenders, such as banks, may bring up the idea of foreclosure to get borrowers to make timely payments.
More often than not, lenders will try to avoid the foreclosure process, as it’s expensive and time-consuming. It involves legal proceedings, selling the home at an auction, or putting it up for sale in an effort to recoup their losses. All of this means a potential loss of profit for the lender.
Of course, foreclosures do happen when borrowers miss a string of mortgage payments. More specifically, lenders will revoke the home’s title once 4 mortgage payments are missed, or about 120 days since the last mortgage payment. At this point, the borrower has defaulted on their mortgage.
However, the process varies from province to province and lender to lender. Once the foreclosure is finalized, borrowers will usually have 30 to 35 days to vacate the premises.
During the foreclosure period, most lenders are still open to negotiation. If a borrower shows that they can start making payments again, the situation may be resolved.
But, if the lender concludes that the borrower cannot make payments at all, they can foreclose on the home and then attempt to sell in one of two ways:
Judicial Sale
A judicial sale is one of the main resolutions used in foreclosure proceedings in British Columbia, Quebec, Alberta, Saskatchewan, and Nova Scotia. It occurs when the lender petitions to the judicial court for permission to sell the home. This process takes much more time and money because of the lengthy court case and legal fees involved.
Lenders in these provinces can begin the foreclosure process immediately after the first mortgage payment default. Soon after, a legal proceeding will begin. The borrower will be served with a “Statement of Claim for Debt and Possession” and will be given 20 days to file a “Statement of Defence” in response.
If the borrower loses their case or doesn’t file a Statement of Defence at all, the lender will be granted permission to sell the home. The whole judicial foreclosure process can take several months to a year.
Once the process is over, the lender can sell the property with the help of a real estate agent or through a real estate auction. A large portion of the return they see from reselling the property will then be used to cover their legal fees.
Power Of Sale
Common in Newfoundland, Ontario, P.E.I. and New Brunswick, a Power of Sale is when the lender, through a clause in a homebuyer’s mortgage contract, has the right to sell the property and avoid the judicial court procedure.
It typically starts after 4 missed payments. The borrower is given a 35-day redemption period, during which they’ll have the opportunity to catch up on their defaulted payments, as well as any outstanding tax arrears, late penalties, and fees associated with the Power of Sale itself.
If, however, the borrower fails to make these payments, they’ll again be served with an eviction notice and will need to vacate the premises within 30 days. Once again, the lender is likely to sell the property through a traditional real estate sale or at auction. However, they’ll need to sell it at the highest price possible as a way to cover the balance remaining on the unpaid mortgage.
A Power of Sale is typically a much faster process than a foreclosure.
See How Much You Qualify For
Pros And Cons Of Buying A Foreclosed Home
As we mentioned, foreclosures and sales of foreclosed homes are rare in Canada and are more common in the United States. That said, it does happen and there are ways that you can buy a foreclosed property, which involves a different procedure than a traditional home purchase and mortgage.
However, before you start looking into buying a foreclosed home, it’s important to understand the inherent benefits and risks involved.
Pros:
- Potential deals. Lenders will want to sell the property quickly to recuperate their losses. They may even sell it at a lower price than it was initially. If you buy the house at auction, it’s sometimes possible to get an even lower price.
- Potential to add equity quickly. If you’re able to get a home that needs a lot of work for under-market value, you may be able to quickly add equity into the home and increase its value with some renovating. This offers the potential for a higher ROI.
- More negotiating power. As mentioned, lenders don’t like dealing with foreclosures and prefer to get them off their hands quickly. Lenders don’t necessarily want to own property because it costs money to carry a home. As such, you may have more bargaining power to get a better deal.
Cons:
- You must move quickly. Foreclosed homes that are being sold at a steep discount will catch not just your attention, but other buyers looking for a deal as well. If you want the home, you may have to move quickly to claim it. But sometimes this sense of urgency may prompt you to make a deal on a home you’re not ready to buy just yet.
- You may spend more than you thought. While foreclosed properties can be cheaper, they’re often not rock-bottom prices. More often than not, you would acquire the home at only a slightly cheaper price than it was initially. And if you wind up finding major issues after you take possession, you may have to spend a lot more than you thought to fix the place up.
- Complex legalities. The legal and financial procedures for buying a foreclosed home are more strict and complicated than the average home sale.
- As-is condition. Foreclosed homes are usually sold in a “what you see, is what you get” state, meaning you’ll have to cover all repairs or renovations by yourself. You’ll also have to get rid of any possessions that may have been left behind.
- More restrictive visiting hours (before you buy the home). If the property is damaged or the hydroelectricity has been shut down, you may only be able to view the home during certain hours and when accompanied by a realtor, if you’re allowed to schedule a walk-through at all.
- Lengthy process. A typical real estate closing takes anywhere from 30 to 60 days. But with a foreclosure, the process can often be drawn out. If you’re in a bit of a rush to move into your new home or prefer a more predictable closing process, a foreclosure may not be for you.
The Importance Of Your Credit
Even if the foreclosed home sells for a relatively low asking price, it’s still likely to cost a pretty penny. Therefore, it’s essential to save the most money as possible, so that you’re able to comfortably afford your future mortgage payments, as well as your other regular expenses. One way you can do that is by securing an affordable interest rate for those payments, which you can do by making sure your credit score is in good shape before you apply for financing.
In Canada, credit scores range from 300 to 900. A score of 680 or higher is a sign of good credit. Your lender will consider you more creditworthy and will offer you the best approval chances and interest rates as a result.
While you may be able to secure financing with a lower credit score, your interest rate will be higher because of it. This will cost you more over the life of your loan.
So, by raising your score, you’ll be effectively saving yourself money over the course of your new mortgage. From then on, you can continue to strengthen your credit score with every timely mortgage payment you make going forward. This will put you in a better position to get lower interest rates for any credit products you apply for down the line.
Final Thoughts
Buying a foreclosure property could potentially help you save a lot of money, but there are risks associated with the type of transaction. If you’re looking for financing to help you purchase a foreclosure property, be sure to team up with professionals who understand the process. This will save you a lot of stress and money.
