When you take out a mortgage, you’re under legal obligation to make your payments in full and on time every month. Your lender specifically researches your financial history to make sure that you’re fully qualified and able to pay your home loan back, or else they would never agree to approve you for a mortgage.
If for whatever reason, you’re unable to make your mortgage payments and end up defaulting on your mortgage, you risk losing your home. Your lender will seek some sort of remedy to get their money back, usually by collecting on their collateral – your home – in order to recoup their funds. One such way to do this is through a power of sale.
To learn more about missing mortgage payments and foreclosures, click here.
What is a Power of Sale?
A power of sale essentially allows the lender – not the homeowner – to sell the home if the borrower defaults on the mortgage. A power of sale is a clause that’s written into a mortgage that gives the lender the authority to sell the property if the homeowner is in default in an effort to repay the loan debt.
In terms of mortgages, a power of sale is very similar to a foreclosure. In fact, both terms are often used interchangeably. That said, in the case of a mortgage foreclosure, the lender takes total control over the property and owns it completely, then is allowed to sell it without having any obligations to the owner as far as resale price is concerned.
On the other hand, with a power of sale, the lender must sell the property for the highest price possible with any proceeds coming out of the sale going towards paying off the remainder of the loan and any interest arrears or commissions associated with the default. If there are any funds leftover, they go back to the homeowner as title still remains with them.
To read about getting a deed in lieu of foreclosure, look here.
When a homeowner is in default and a power of sale is being sought by the lender, a letter will be issued to the borrower stating that the mortgage must be brought up to date – along with any tax arrears – by a specific date. If not, a power of sale process will be initiated.
A power of sale is typically sought as a resolution before opting for foreclosure in the provinces of Ontario, New Brunswick, Newfoundland, and PEI. It’s a quicker process and can result in a quicker solution before having to get the courts involved as is customary with foreclosure.
For more information on the foreclosure process in Canada, read this.
What Can Borrowers Do When Facing a Power of Sale?
If you are a homeowner who has fallen behind on your mortgage payments and are facing a potential power of sale process, there are some options available. A power of sale can often be a time-consuming and complicated process for lenders, so they may often be willing to come up with a different plan of attack to get their loan money back if you are willing and able to meet them in the middle.
If you default on your mortgage, be sure to get in touch with your lender right away to discuss any possible alternatives so that you can bring your mortgage payments back up to par and avoid a power of sale or another process that will leave you without a home.
Click here to read about high ratio mortgages and default mortgage insurance.
One option that you may want to consider is to secure another mortgage from another lender. This mortgage can then be used to pay off your original mortgage and any arrears that come with it or to bring the arrears up-to-date with a second mortgage. This option might even allow you to spread out the rest of your mortgage repayment over a longer time frame and even reduce your monthly mortgage payments.
Want to know how much it will cost to purchase a house in your city? Check out this infographic.
Can Buyers Get a Deal on a Power of Sale?
Homebuyers are always on the lookout for a deal on their next home, and often the term “power of sale” is synonymous with a discount. However, buyers need to be aware that lenders are obligated to get market value for power of sale properties once they take possession. That means there’s often little wiggle room for what could be classified as a “deal.”
In addition, a power of sale property is typically sold “as is.” That means any issues with the home will not be rectified by the seller and will become the buyer’s problem once the deal is sealed. The lender won’t be able to offer the buyer any assurance about the condition of the property since they really have no specific information about it.
If you’re in the market to buy a home and are considering buying a power of sale property, be sure that you’re aware of the potential pitfalls that come with such a purchase, and don’t get your heart set on getting a rock-bottom price on it. Having said that, it still might be worth your while to buy a power of sale home as long as you take measures to ensure that you fully understand what you’re buying.
How to Prepare to Purchase a Power of Sale House
For starters, a home inspection is absolutely important when buying a power of sale property. Even though the seller might not do anything about any problems that are discovered by the inspector, you will still have a much better understanding of the condition of the home and can walk away from the deal before signing on the dotted line.
Making your purchase agreement conditional on your satisfaction of the inspection report is important for any real estate transaction, but it’s especially important when buying a property that’s being sold as a power of sale.
A power of sale is certainly not a pleasant situation for any homeowner, but it’s often necessary to help lenders get back their rightful funds. If you’re a homeowner who’s in arrears with your mortgage, it’s in your best interests to speak with your lender right away about any potential resolutions that can be sought to avoid a power of sale. If you’re a buyer and are considering a power of sale purchase, be sure to use the services of a real estate professional who specifically has experience buying and selling power of sale properties.