Homeowners facing a power of sale think they might be out of options and on the brink of losing their property. That’s not the case because there are ways to minimize the financial damage and hang on to your equity.
Understanding Power of Sale
A power of sale is a common tool used by lenders who are looking to recover their principal, expenses and interest after a mortgage has been defaulted on. Lenders can also use foreclosure. Banks and credit unions prefer the first choice so they can avoid lengthy court procedures. Plus, the administrative costs and legal fees are lower.
Borrowers don’t need to lose all their investment through this process. Even when a Power of Sale goes through to the end and the house gets sold, the homeowner can claim any surplus from the sale. There are a variety of people that need to be paid first. The lender is first in line and real estate agents fees and lawyers fees need to be included. Execution creditors, lien claimants and others get paid before the homeowner. They get what’s left at the end.
- There’s also a Redemption Period. This is the time where the borrower can bring the whole mortgage into good standing, or they can pay the entire amount off. If they decide to go this route, they need to include the legal fees that the lender has had to pay out. This is another option that can prevent a Power of Sale from proceeding.
- The borrower can also sell the property. The homeowner can set the sale price and get more money than the lender can get in some situations. One of the challenges here is that the borrower needs to sell the place and cover all the arrears that include legal fees, penalties and interest.
Another option is trying to work something out with the lender.
Negotiating with Your Lender
The bank or credit union you have the mortgage with might have some flexibility.
Ask About Forbearance
You need to put together some documentation here like proof of income. The idea is to come up with a written plan you can present to the lender that covers the arrears on the mortgage over a short period.
Be aware that lenders can be strict with the conditions and penalties.
Ask About a Lump Sum Payment
You can approach the lender about making a goodwill lump sum payment to pause the power of sale process on a temporary basis. You can get the money from an RRSP withdrawal through family or from a savings account.
You’ll need to be careful here because if the payments are not big enough to reduce what you owe, including legal costs, the loan can be rejected.
There’s another way to stop a power of sale using the equity that you’ve already built up in the property.
Legal Remedies to Delay or Stop the Sale
It’s important to remember that even during a Power of Sale, the homeowner is the legal owner. That’s the situation until the property gets sold. Buying some time with a second private mortgage that’s essentially a temporary interest-only loan can help stop the process.
There are some big differences between a traditional second mortgage and one of these private loans.
- The private mortgage loan is based on the equity that you’ve built up and the Loan-to-Value (LTV) ratio. You’ll need to have an accurate appraisal done to get the market value of the property. Still, this process has a streamlined application and a faster approval time. They are a good temporary option to stop a Power of Sale because they last for one year.
- These private loans require an exit strategy. That means that you can use the money to pay off the arrears and or penalties on a first mortgage, but you should be looking to refinance with the more traditional lender after that.
Getting fast access to funds through one of these loans takes away the threat of and the impending sale of the house. A private second mortgage allows the homeowner to list the property and set the asking price. It’s a good step to protecting their equity.
Selling on Your Own Terms
Selling the house during a Power of Sale is another option that requires a bit of work but has some advantages. Here are three things to keep in mind.
- You can find a buyer with flexible conditions this way. A borrower can find a buyer willing to waive conditions like a home inspection to speed the process up. Using a private second mortgage here gives you some time to make interest-only payments while you screen these potential buyers.
- Putting together virtual tours and using high-quality photographs on social media can help when you’re trying to sell on your own terms. Using a private loan here allows the borrower to have control over the marketing which can give them up to a year of negotiating power.
- The application process for a private loan is streamlined, which means that a borrower who’s going through a Power of Sale can get the money quickly to stage the property. They can use the cash they get for cosmetic upgrades and even stage the home with neutral furniture.
You’ll have even more time to sell the property during this process when you get an expert working with you on one of these loans.
Seeking Professional Guidance
Finding a real estate expert who specializes in these loans can make the whole process much easier. Look for one that can provide flexible payment terms on short-term interest only loans.
Using one of these experts means that you can get the money quickly to pay off the arrears on the mortgage and the associated fees. That can supply a distressed homeowner with the money to stop a Power of Sale and keep their equity well while they fixed their finances.
Jonathan Alphonso can supply guidance on these private second mortgages and power of sale. Call him at 416-499-2122 or contact Jonathan by email at ron@powerofsalesontario.ca. Learn more at one of his two websites, mortgagebrokerstore.com and powerofsalesontario.ca
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