Facing and Buying Foreclosures in Canada

Mortage by Debomb1
Mortage by Debomb1

With the housing bubble crash in 2008, foreclosures (processes through which an owner’s right to a property is transferred into the hands of the lender after the owner stops paying back the mortgage) have become well-discussed, and the market in foreclosures has gotten larger. Although foreclosure statistics aren’t publicly available in Canada, experts believe the number of foreclosures has increased as a result of worsening economic performance after the crisis and the fact that many Canadians are holding mortgages greater than the value of their house.

Before Foreclosure

Although Canada has more strict lending rules than many countries, still there are thousands of foreclosed properties every year. Sellers are unable to pay their payments for a variety of reasons, and few choose to go into foreclosure voluntarily. It can be the result of:

  • Losing one’s job
  • Excessive, growing private debt
  • Divorce or death of a co-owner
  • Job transfer to another state

However, if you miss or are late with one payment, it doesn’t mean you are in foreclosure. The lender must take certain steps required by law. Before your property gets foreclosed, it must be collateral for the debt to be sold. The debt must be defaulted on and the creditor must fulfill all the legal requirements of the state the property is in. In Canada, mortgage debt belongs to the homeowner, and the lender can take any steps to get delaying money from him or her — even by garnishing his or her wages.

Judicial Sale and Power of Sale

Court Gavel by Wikimedia Commons
Court Gavel by Wikimedia Commons

Judicial foreclosure involves the sale of the property under the supervision of a court. A judicial decision is announced after the pleadings are exchanged at a hearing in a state or local court. This process is generally much slower and more expensive than foreclosure by power of sale (nonjudicial foreclosure), which allows the sale of the property by the mortgage holder at auction but without court intervention. The property is then transferred by deed to the purchaser, the creditor is paid out of the proceeds, and if there is any surplus, it is returned to the debtor.

The foreclosure types also differ in the way the process is started. Judicial foreclosure starts when a lawsuit against the borrower is sent, while in power of sale cases, sending a notice to the borrower and current owner of the property starts the whole process.

Facing Foreclosure

If the homeowner had a down-payment of less than 20 per cent of his or her home’s value when he or she purchased it, mortgage default insurance protects the lender. In Canada, there are three mortgage default insurers: Canada Mortgage and Housing Corporation, Genworth Financial Canada, and AIG United Guaranty. They are able to help homeowners pay their payments when they have difficulties throughout several programs, like forgiving a few mortgage payments.

The problem can be also solved with the help of the debtor’s employer. The human resource department could help the debtor to stay in his or her home by lending a temporary loan or paying out remaining vacation pay. Another way is refinancing his or her mortgage by taking a new loan. However, to refinance, the homeowner’s total debts shouldn’t be greater than 90 per cent of the home’s value. The debtor might also visit a debt settlement company that will talk to his creditors and reduce his interest rates or debts without affecting his credit rating. If none of those steps works, a bankruptcy trustee should be contacted, who will draft a consumer proposal or help the debtor filing for bankruptcy.

There is also the option of selling the home before the lender does. The debtor’s credit score won’t be hurt, but he or she will have to pay the lender the costs of the proceeds of the sale. If the home is sold as foreclosed property, it will stay on the debtor‘s credit report for six years.

Buying Foreclosure

Foreclosure by BasicGov
Foreclosure by BasicGov

[For detailed information visit our How To Buy Foreclosures In Canada guide]. While one could find oneself homeless after the foreclosure process, someone else can happily purchase a foreclosed home for markedly less than market value, and with relatively little legal troubles. Lists of foreclosed properties are easily available via the Internet, e.g. Canada Foreclosure List. First of all, the buyer should thoroughly browse the offer, pick the home, and determine whether it is a Power of Sale foreclosure or a Judicial Sale foreclosure, as it determines who is selling the property. Then he should contact the lender of the mortgage to learn how the home is going to be sold.

If the sale is a Power of Sale foreclosure, the lender retains the right to sell the foreclosed home via contract. Judicial foreclosures are usually sold by the court at an auction where the highest bid takes the ownership. Sometimes buyers are not allowed to come to the house before making an offer so they can’t predict the costs of reconstruction. Buying a foreclosed home also incurs moral risks. You may need to evict the tenant or owner after purchasing, and you don’t know whether the occupant won’t destroy the home in revenge.

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