If we learn from experience, we know that sometimes life doesn’t go as expected – a notion recently underpinned by the COVID-19 pandemic. No matter the preparing and projecting we manage to muster, even best-laid plans get derailed when life gets in the way. When most people buy a home, they have every intention of sustaining fiscal responsibility and fulfilling their mortgage obligations. When faced with major events such as job loss, reduced wages, divorce, disability or illness, however, the ability to make mortgage payments in full and on time can become difficult. After a while, when missed payments become too far gone, the mortgage will fall into a state of default, forcing homeowners to forfeit all rights to the home. This is known as a foreclosure.
A lengthy and costly process, a mortgage foreclosure should be avoided whenever possible. Most lenders are willing to work with homeowners who encounter financial difficulty, so it’s best to try and resolve issues before they take a turn for the worse. But, if the situation is unavoidable, one of two foreclosure procedures will take place – each one distinguished by its degree of involvement with the court system and the province in which the homeowner resides.
Your mortgage professional is a good place to start when anticipating problems paying your mortgage
Mortgage foreclosure process
- Power of Sale
A Power of Sale, typically carried out in Ontario, New Brunswick, Newfoundland and PEI, can usually be completed within a few short weeks given there is very little need for court involvement. During the process, the lender provides the homeowner with a formal written notice and grants a 35-day period in which to pay back all outstanding arrears. This provides the borrower with an opportunity to get back on track and save their home. If they’re unable to do so, they’ll be issued an eviction order by the lender, who, without officially assuming ownership or title to the property, has the right to sell it in order to repay the outstanding loan. If there’s any money left, it will be returned to the borrower. If there’s a shortfall, the lender could sue the borrower in order to recoup the remaining balance.
- Judicial Foreclosure
As the name implies, this process relies heavily on the court system and, therefore, tends to be drawn out longer than a Power of Sale, with a resolution taking six months to a year. The preferred method in BC, Alberta, Manitoba, Saskatchewan, Quebec and Nova Scotia, a Judicial Foreclosure represents a lawsuit whereby a lender files a Statement of Claim with the court. This is officially served to the homeowner who then has a set period of time in which to reply. If a resolution is not possible, the mortgaged property will be transferred to the lender and sold under court supervision. Any proceeds from the sale will be used to pay the lender or any lien holders. The borrower relinquishes all rights to any capital gains that may result from the sale of the property.
Bankruptcy to deal with mortgage shortfall
The decision to file for bankruptcy should not be taken lightly. But, for homeowners struggling to make ends meet, the option may provide a viable solution. A bankruptcy will erase debt issues, thereby improving cashflow and allowing a homeowner the opportunity to catch up on missed payments. If after eliminating all other debt, mortgage payments are still unmanageable, however, the homeowner may be forced to sell the home. If there’s a shortfall after the sale, the amount due can be included in the bankruptcy, allowing the consumer to walk away free from any further financial burden. Should there be any equity after the sale, it will be used to pay creditors.
Foreclosures are costly for all parties involved and it’s important to find a suitable plan to put the mortgage back on track, where possible
Options if you’re behind on your mortgage
Falling behind on mortgage payments or anticipating difficulties going forward should always be dealt with as early as possible. Periods of financial difficulty are not uncommon and there are several options available to avoid an ultimate foreclosure. Deciding which is most suitable depends on the nature of the issue and whether the problems are temporary or if financial hardship is likely to persist.
Consider the following options:
- Payment deferral. The mortgage is put on hold temporarily and payments are suspended for a set period of time
- Repayment plan. Special payment arrangements are made with the lender and missed payments can be spread out over the repayment period
- Loan refinance. A new mortgage is arranged to replace the old one in order to take advantage of lower interest rates, consolidate debt or extend the amortization period to lower payments
- Mortgage modification. Existing mortgage features are changed to facilitate payment management such as converting a variable rate to fixed or extending the balance by adding it to the principal
- Credit counselling. Expert advice is obtained in order to establish expense management strategies, debt relief solutions and repayment goals
- Liquidate assets. Profits from selling assets that can be converted into cash are used to pay down debt
- Downsizing. Proceeds from the sale of the current home are used to pay off the mortgage and facilitate the purchase of a more affordable place to live
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