A power of sale can have several long-term effects on a homeowner in Ontario. There are various implications, including financial, emotional, and market consequences. A power of sale can lead to higher interest rates, impact your credit score, and even limit your opportunities to own another place.
This is a standard remedy lenders use after a borrower has broken the terms of a mortgage agreement. Most often, borrowers have missed one or more mortgage payments.
However, a mortgage default can also include a breach of a covenant. That includes using the property for legal activities, not ensuring it, or not paying the property taxes. Another way a borrower can breach a covenant is to damage the property intentionally.
Fifteen days after a mortgage default, the lender can deliver a Notice of Sale under Mortgage. After that, the lender must wait up to 40 days before moving forward. During this time, the borrower is given a chance to make things right financially through the Redemption Period.
Failing that, the lender can issue a Statement of Claim leading to a default judgment. That can result in a Writ of Possession, and the borrower can be evicted from the property.
Understanding the whole power of the sale process means drilling deeper into the costs.
It’s possible that the evicted homeowner can see some money once their former house has been sold. However, the lender gets paid first, and all the money they spent selling the property gets reimbursed.
Usually, a former homeowner receives very little or none of these proceeds. If the lender doesn’t get all the money they made on the investment, they can file a Writ of Execution to get the rest from the former homeowner.
The financial costs aren’t the only ones.
Homeowners who are going through a power of sale or have been through the process suffer from stress and anxiety. These people can suffer from a constant fear of financial instability that affects how they make all their decisions.
One psychological effect is “catastrophic thinking,” which can trigger emotional reactions and exaggerated responses. Going through a power of sale can leave a person imagining worst-case scenarios and the worst possible outcomes, including losing their property and financial stability.
People going through the process can also experience emotional and psychological overload, where their concentration and memory are impaired.
Many people equate their self-worth with owning a house. However, a power of sale can leave them questioning their identity and self-worth.
A private mortgage or loan can offset these emotional and psychological effects. The money you get from an alternative lender can stop a power of sale and provide an interest-only loan to help you rebuild your finances.
These are based on equity, which is the part of the property that you’ve paid off and that is mortgage-free. That gives them an advantage over a bank loan, which focuses more on your credit score.
It’s a good idea to do whatever is necessary to avoid the negative consequences of a power of sale.
If one of these goes through and a homeowner gets evicted, several other consequences include:
A power of sale is reported to the credit bureaus in Canada. It can damage a current score by several hundred points. It can stay on a credit report for up to seven years and represents a negative strike against people looking for new credit or loans.
Borrowers who have gone through a power scale can be categorized as high risk, limiting their credit access and leading to stricter terms and higher interest rates. Equifax lists some other factors that can impact a credit score.
Traditional mortgage lenders will be more strict on someone who’s gone through a power of sale. These people are often looking for what are called bad credit mortgages, which are supplied by private lenders. Private lenders focus more on the equity built up in the property than on the borrower’s credit score.
There are several consequences, including the fact that traditional lenders might ask for bigger down payments, which can equal as much as 20% to 30% of the property value. A bank or credit union might even ask for a cosigner for someone who has a power of sale on their history.
Private lenders are more lenient and will even include non-standard forms of income, such as contract and freelance work.
Getting back on your financial feet after a power of sale requires some of the following.
Once your credit starts to recover, it’s a good idea to consider alternative lenders who have different criteria and a more streamlined application process than banks. Understanding everything about power of sale can help you opt for one of these loans that can stop the process.
jonathan November 19th, 2024
