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For many Canadians who struggle to make mortgage payments on time, foreclosures are a looming threat and a scary thought to process. If a homeowner is 3 months overdue on their mortgage payments, they face the real risk of having their home repossessed by their lender. As we continue to deal with COVID-19 and its impact on personal finances, it’s smart to be prepared, regardless of your current situation as a homeowner. Whether you’re worried about an impending foreclosure, or you’ve never even thought about the impacts of one, take the time to learn more so you’re prepared to make smart financial decisions for your future, should a hardship arise.
How Does A Foreclosure Work In Canada?
Depending on where you live in Canada, you’ll be looking at a few options when faced with a foreclosure. It’s important to note that while you won’t be the one deciding which option to choose, it’s wise to understand each one so you have a better idea of what comes next, should you find yourself facing a foreclosure.
Power Of Sale
Power of sale is the lender’s first choice in Ontario, New Brunswick, Newfoundland and Labrador and Prince Edward Island. It’s the most common type of foreclosure in Canada and is a process that requires less legal involvement and more cooperation. When you’re facing foreclosure, this option gives you the possibility of keeping your home, but be aware that it may be expensive!
If you’ve defaulted on your mortgage payment for longer than 15 days, your lender has the right to send you a notice of sale or notice of sale under mortgage which is the first step in the power of sale process. If you find yourself looking at one of these notices, your first step is to call your lender as soon as possible to see if you can negotiate to pay what you owe before the process actually begins (typically 35 days). If you’re able to connect with your lender and pay what you owe in time, you can keep your home and put this all behind you (hopefully with a better reminder system and plan for future payments). If you’re unable to catch up within the given time period, your lender will issue an eviction notice and will have the right to sell your home in order to repay the outstanding loan. If there’s any money left afterward, it gets returned to the borrower. If the opposite occurs and there isn’t enough money from the sale to cover what’s owed, the lender can actually sue the borrower to recoup the remaining balance.
In case the name didn’t quite give it away, this process relies heavily on the court system, and as a result, tends to be drawn out a lot longer than a power of sale (6-12 months typically). This is the preferred method in BC, Alberta, Manitoba, Saskatchewan, Quebec and Nova Scotia. A judicial foreclosure is a process where the lender files a statement of claim with the court, aka a lawsuit. This gets served to the homeowner who is then given a specific period of time in which to reply. If it’s not possible to find a resolution, the property gets transferred to the lender and can be sold under court supervision. Unlike a power of sale, the borrower relinquishes all rights to any capital gains that may result from the sale of the home once the amount that’s owed is repaid.
If you’re starting to worry about making payments on time or you foresee an issue that may prohibit you from keeping up with your mortgage payments in the near future, there are a few things you can consider:
Mortgage Deferral (Forbearance)
While many people took this route during the pandemic as they lost their cash flow and found themselves in a not-so-ideal financial situation, mortgage lenders have been offering short term deferrals (or mortgage extensions) in extenuating circumstances for decades. Have the conversation with your lender about putting your payments on hold temporarily if you’re suddenly worried about making your payments on time.
Find A New Lender
If your lender isn’t open to negotiating to help you, it may be time to consider moving your mortgage elsewhere. Find out what that process would entail and look into your other options so you ensure you’re comparing apples to apples and taking into consideration any additional fees you may encounter as a result of your decision.
Selling Your Home
If you think the sale of your home is likely to produce more cash than what you owe the bank, it may be wise to consider selling your home before the bank has a chance to foreclose. This would mean that any money left over once you’ve paid what you owe, would go directly into your pockets, and not someone else’s.
If your struggle to make mortgage payments stems directly from your inability to manage other debt, you may want to consider filing for bankruptcy (or consumer proposal) before you immediately choose foreclosure. This process can help you get a better hold on your finances overall and could make homeownership a lot easier.
Renegotiate Your Mortgage
Depending on your chosen mortgage amortization period, your lender might be willing to extend it and modify your loan accordingly. The longer you stretch the mortgage term, the lower your monthly mortgage payment becomes, so this simple adjustment could be enough to help keep you on track without taking any drastic action.
When Can I Buy A House After A Foreclosure?
Lenders will be looking at your credit post-foreclosure and ensuring you have since recovered and made fundamental changes in your life that have led to a rebound with your credit score. They’ll also want reassurance that the foreclosure was caused by a one-time event and not as a result of poor financial habits.
If you’ve moved past your foreclosure and are looking to buy another house, it’s wise to start by approaching a conventional lender about a loan to see what insight they can give you based on your current situation. Depending on the type of loan, your lender and additional factors, you might have to wait 2 – 8 years to get a new loan.
While there may be some private mortgage lenders who could shorten your waiting period to 12 months after foreclosure, they’ll likely ask for a large down payment in return (upward of 25%) or give you a higher interest rate to offset the risk so be aware of these tradeoffs.
How To Rebuild Credit
A foreclosure typically appears on your credit report within a month or two after the lender initiates the proceedings. It stays on your credit report for 7 – 10 years from the date of the first missed payment that led to the foreclosure. The impact that foreclosures have on your credit score can be immense, but they will vary for each individual as it will depend on your lender, your personal circumstances, the value of your home and the outstanding balance still owed on the mortgage.
Keep in mind that credit scores are always changing, so if you’re worried about the impact a foreclosure will have on your score, just know there are ways for you to improve it:
Monitor Your Score
Knowing your credit score is the first step toward understanding how you can improve it. If you’re unsure what your credit score is, you’ll want to start by signing up for a service that allows you to monitor your score regularly. Once you have a better idea of your score and how it may be impacted by a foreclosure, you can focus on how to improve it moving forward, if steps are necessary.
Do yourself a favour and start building smart credit habits. Always keep an eye on your credit report to ensure errors are properly reported and if you come across any issues, follow the necessary steps to get things resolved in a timely manner so they don’t affect your ability to borrow money from a lender:
1. Identify the credit report that includes late payments or incorrect charges you’d like to dispute.
2. Contact your creditor about fixing the error so they can investigate your claim.
3. If the creditor is taking too long or refusing to fix the error, contact the credit bureau.
Make Payments On Time
Making payments on time is crucial. Lenders will expect you to make payments diligently for months/years. Paying on time not only protects you from unwanted penalties, but it also protects your credit score from being damaged in the process. Maintaining a good repayment history is crucial for keeping your credit score high (credit history accounts for 35% of your score) and will only help you in the future should you require additional loans or funding. If you’re notorious for forgetting or worried it may slip your mind occasionally, consider setting up automatic withdrawals or reminders.
Do Not Submit Numerous Credit Applications
Occasionally you may need to apply for more credit. Just make sure that when you do so, you keep these applications to a minimum, so when lenders check your credit report, they don’t see red flags of a borrower who may be living beyond their means or urgently in need of more money. To keep this in check, be sure to limit the amount of times you apply for credit and apply only when you really need it. It’s also important to note that any checks that come through within a 2-week time frame will be counted as one hard inquiry, so when you’re shopping around for better rates on a car loan or mortgage, be sure to cluster all your appointments so your credit score doesn’t take an unnecessary hit when you’re about to need it most.
Maintain Low Credit Utilization
While you may have a credit card with a $20,000 limit, that doesn’t mean you should be using the maximum credit. In fact, how much credit you’re using (credit utilization) makes up 30% of your credit score. As a rule of thumb, try to use less than 30% of your available credit as it’s always better to have a high credit limit and use less of it each month. If you tend to use up a lot of your available credit, lenders may see you as a risk, even if you pay your balance in full when it’s due. To calculate your ideal credit usage each month, add up the credit limits for all your credit products (loans, credit cards, etc.) and then calculate what 30% of that total equals so you know the maximum amount you shouldn’t exceed each month.
Facing a foreclosure can be very stressful, especially if you aren’t informed about your options and don’t understand the process. The more you know in advance, the better suited you are to make the best decision you can for your personal situation. Want to speak with a professional to learn more about your options? The team at Rocket Mortgage can help!