When a homeowner stops making mortgage payments, foreclosure is one of the processes the mortgage lender can use to recover their money. In Ontario, power of sale is by far the most common remedy used by lenders, but the occasional foreclosure does happen. Power of sale and foreclosure are two distinct legal processes with different outcomes. In a power of sale, the lender can sell the property to recover their money and any excess profits are given to the former homeowner. In a foreclosure, the lender takes title to the property and all the equity in it. For this reason, it is recommended that the homeowner acts immediately to try to stop the foreclosure. In general, a power of sale takes around 6 months to complete and a foreclosure takes at least a year to complete. Both legal processes begin when a Notice of Sale is sent. The next document, the Statement of Claim will confirm the legal process being used, it will explicitly state that it is a “foreclosure action” near the top of the document.
This is an example Statement of Claim for foreclosure document. Take note of the bold text: “MORTGAGE ACTION – FORECLOSURE”
If you’ve received a Statement of Claim that states that you are foreclosure, you have a few options available to you depending on when the document was sent and the amounts owing. The very first thing to try is to contact your lender and see if you can work out an arrangement to pay off what is owed. Some lenders will be understanding and work out a new payment plan or new financing to bring the mortgage back into good standing. However, in many cases, the lender will not be willing to negotiate and will demand payment. The Statement of Claim document will outline how much the lender is asking for and the last day that payment will be accepted. This amount is typically the value of the arrears plus fees. After the last day to pay has passed, the full amount of the mortgage plus fees will be due. In an Ontario foreclosure, the homeowner can also make a request for sale to convert the foreclosure process into a power of sale process. Filing a request for sale is recommended if the value of the property far exceed the value of the mortgages. If you are unable to negotiate with the lender, you can still arrange new financing to pay them off or sell the property.
In many cases, the lender will refuse to make any extra arrangements and will simply want what they are owed. Since someone in foreclosure is considered to be a high-risk client, most banks and large lending institutions will turn them down. There are many private lenders that can offer mortgages to people in power of sale or foreclosure, but it requires that the property has sufficient equity. Most private lenders can approve a mortgage as long as the total value of the mortgages on the property is not in excess of 80% of its estimated value. If the first mortgage lender is asking for arrears plus fees, then a private lender can provide a new second mortgage to pay the first mortgage lender. If the second mortgage lender is threatening foreclosure, then the private lender can replace the existing second mortgage with a new one. If the first mortgage holder is requesting the entire mortgage, then a private lender may be able to buy out that mortgage to stop the foreclosure. Many of these private lenders do not advertise and can be hard to find, so it is recommended to get in touch with a mortgage broker for help.
If the total values of the mortgages are too great, then private lenders will refuse to provide a mortgage. At this point, there are typically only two options. Either sell the property or allow the foreclosure to take place. If you think you can make a sizable about of money by selling the property then it is strongly recommended to do so. Once a foreclosure is complete, the lender takes title to the property and the former owner gets nothing. For this reason, even if the property must sell at a discount, it is usually better than allowing the lender to take the property.
