A borrower can still owe the lender money even after a power of sale is finished. That situation can happen when the house gets sold, but the money doesn’t cover the mortgage debt. If you still owe money after a power of sale, there are several techniques to handle the financial aftermath.
You might find yourself undergoing a power of sale when you’ve missed mortgage payments or breached one of the covenants of your agreement. There’s a strict process involved in a power of sale, which includes six different steps. Ultimately, the property is sold, and the proceeds are used to pay off debts.
It’s pretty often the case that the homeowner doesn’t receive any proceeds from the sale because the lender needs to pay various expenses, including real estate, lawyer fees and related money.
Other mortgagees, lien claimants and execution creditors are in line for their money before the homeowner. If the mortgage lender doesn’t get their entire investment principal back, they can file a Writ of Execution to get the remaining money from the homeowner.
First, it’s important to understand the term deficiency balance. It occurs when the money or proceeds from the sale of a house or property under a power of sale don’t cover the mortgage debt and associated costs, such as legal fees. These costs include accrued interest, the mortgage principal, any penalties, and other related expenses.
There are several reasons for this situation, including a buildup of unpaid interest and other penalties that increase the amount of money needed for a profitable home sale. A drop in market values can also cause a deficiency in balance.
The lender incurs expenses when selling the property, including real estate agent fees. These are repaid first after a sale. However, sometimes, a lender can’t recover all of their investment principal.
When that’s the case, the lender can go to the local sheriff and file what’s called a Writ of Execution for the remaining money owed. Here’s how a lender gets to that point.
This gets directed to the sheriff in the proper location. Legal officials can seize bank accounts, real estate and personal property, and some borrower’s assets. The idea is to recover the money left short from the sale.
Homeowners need to know how to make the right financial choices after a power of sale to avoid further problems.
You don’t want to wind up heading down a financial slope that can lead to another power of sale. Here are several things that you can do to avoid the kind of financial strain that got you in trouble in the first place.
One of the best ways to avoid the power of sale is to sell the property before the process starts. This can save you some of your equity.
Some owners consider a direct private sale. Homeowners can market their houses through classified ads, social media, and online platforms. They will save on a real estate agent’s commission, but they must do all the marketing themselves.
After you’ve been through a power of sale, you want to avoid the process from happening again. That’s why budgeting is a good idea. One of the more popular templates to use is called the 50/30/20 rule. That’s where homeowners can allocate 50% of their money to necessities, 20% to debt repayment and savings and 30% to entertainment and other types of spending.
Prioritizing your needs over your wants can help you after a power of sale. You can also mitigate the financial strain by monitoring your credit report at either TransUnion or Equifax. Reporting errors in your personal information and tracking your credit mix can help you rebuild your score.
Refinancing your current mortgage can lessen your financial strain after a power of sale. A private lender mortgage can give you the money to stop the process if it has started. A second mortgage through a private lender can provide interest-only payments over one-year terms. You can use the money as a temporary financial bridge to eliminate current issues.
Homeowners can face one of these two options when facing deficiency balances.
Borrowers who need to repay deficiency balances can keep some of their assets while repaying with one of these plans. Another advantage is that there’s not as much damage to a credit score as with bankruptcy.
A repayment plan also allows a borrower to negotiate a repayment schedule. One significant feature of these plans is that they require creditors’ cooperation.
One of the significant advantages of declaring bankruptcy is that unsecured debts, including deficiency balances, can be eliminated. However, there’s a big hit to a credit rating with a bankruptcy record that can stay on your report for up to 7 years.
Still, there are some caveats. For example, private mortgage loans can be considered secured debts. BankruptcyCanada.ca explains the situation if you have no equity. Then, the asset does not become involved in your bankruptcy, and you can keep it by making mortgage payments.
Borrowers with positive equity are facing a different scenario. They can subtract the bankruptcy exemption value, but the excess needs to be included as an asset in the bankruptcy estate.
Jonathan Alphonso is a real estate expert with experience in power of sales and foreclosures. Jonathan maintains information sites, including mortgagebrokerstore.com and powerofsalesontario.ca. Reach him at 416-499-2122 or by email at ron@powerofsalesontario.ca.
jonathan March 21st, 2025
