Power of Sale vs Foreclosure Explained: A Comprehensive Overview
As a homeowner, understanding the intricacies of mortgage repayment and the potential ramifications of defaulting on your obligations is critical. Two primary outcomes loom over homeowners who fail to meet their mortgage obligations: Power of Sale and Foreclosure. While these terms may seem interchangeable, they represent distinct processes with significant implications for homeowners. This piece aims to explain the Power of Sale vs Foreclosure dichotomy, providing an in-depth understanding of each process.
Understanding the Core Concepts: Power of Sale
The Power of Sale process is commonly invoked in Ontario when a homeowner stops fulfilling their mortgage repayment duty. This process grants the mortgage lender—referred to as the mortgagee—the legal power to enforce the sale of the property to recover the outstanding mortgage funds.
This procedure is popular among lenders due to its expediency and lower legal costs, usually commencing 15 days after the first missed payment. The process follows a structured path:
- The lender issues a Notice of Sale.
- A redemption period of 30-40 days ensues, during which the homeowner can offset the arrears.
- The court issues a judgement.
- A Writ of Possession is issued, permitting the mortgage lender to evict occupants and sell the property.
In a Power of Sale, mortgage lenders hold a fiduciary duty to fetch a fair market value for the property. Any surplus from the sale—after settling the mortgage debt—goes to the homeowner. However, if the sale proceeds fail to cover the total amount owed, the lender has the right to sue the borrower for the deficit.
The Basics of Foreclosure
Foreclosure is an alternative to the Power of Sale process. Here, the mortgage lender assumes complete legal ownership of the property. The lender can then rent or sell the property at their discretion.
This process is more drawn-out than the Power of Sale, often taking over a year to complete. Moreover, the lender usually waits for several missed payments before initiating the court proceedings.
Unlike in a Power of Sale, a foreclosing lender is not obliged to sell the property at the highest price. Any profit from the sale is retained by the lender, with no obligation to the original homeowner. Importantly, once foreclosure is completed, the lender forfeits the right to sue the homeowner for any shortfall.
Power of Sale vs Foreclosure: Key Differences
Despite appearing similar, Power of Sale and Foreclosure are distinct processes. They both start with a Notice of Sale and a Statement of Claim, followed by a Writ of Possession. However, the type of action—whether it’s a Power of Sale or Foreclosure—will be specified in the Statement of Claim.
Here are the fundamental differences between Power of Sale and Foreclosure:
Power of Sale / Foreclosure
Lender gets the right to sell / Lender assumes legal ownership
Can commence 15 days after first missed payment / Begins after multiple missed payments (3-6 months)
Notice doesn’t involve court / Court issues demand for payment
35-40 day redemption period to offset arrears / 30-day redemption period, extendable
Lender must sell at fair market value / No obligation to fetch highest price
Surplus is paid to borrower / Surplus is retained by lender
Lender can sue for shortfall / Lender forfeits right to sue for shortfall
Navigating a Forced Sale: Viable Options
Owning a home is a significant financial commitment. Coupled with other financial obligations, such as car loans or credit card debt, it can become overwhelming. That said, your home is also likely your most valuable asset. So, if you’re struggling with mortgage repayment but wish to keep your home, there are several options available.
Remember, the sooner you act, the more options you’ll have. Here are some strategies to consider:
- Refinancing with a second mortgage.
If your home has positive equity, you could opt for a second mortgage to offset the arrears. Ensure you can afford the future monthly payments. - Restructuring the mortgage with a different lender.
Extending your mortgage’s amortization period could reduce your monthly payments. If your current lender is unwilling to negotiate, consider seeking help from a mortgage broker. - Selling or downsizing.
If your mortgage payments are too hefty, consider selling your home and purchasing a smaller one before eviction. Temporary renting is also an option. - Filing a consumer proposal.
This could help reduce your monthly credit card and bill payments if unsecured debt is causing your budget shortfall. Consequently, your mortgage payments could become more manageable. - Filing for bankruptcy.
If bankruptcy is the only way out of your unsecured debt, you can still keep your home as long as you maintain your mortgage payments. - Walking away from your mortgage.
If your mortgage is underwater, you can hand the property back to the lender. Any shortfall after selling the property can be discharged through bankruptcy or a consumer proposal.
The Role of a Licensed Insolvency Trustee
If you’re overwhelmed by both mortgage and non-mortgage debt, consulting a Licensed Insolvency Trustee alongside a mortgage broker could be beneficial. A mortgage broker can help you refinance and introduce you to a private mortgage lender. However, high-risk mortgages usually come with higher interest rates and might not be the best option if they suggest including unsecured debt into the new mortgage.
A Licensed Insolvency Trustee can help you explore alternatives to clear your debts and make your mortgage payments more manageable. They can provide a second opinion on your budget and suggest alternatives that could leave you financially stronger after restructuring your debt.
In conclusion, understanding the Power of Sale vs Foreclosure processes is crucial for homeowners. Whether you’re currently facing these predicaments or just seeking knowledge, we hope this guide has provided valuable insights. The key takeaway is to act swiftly and seek professional advice if you’re struggling with mortgage repayments. Remember, your home is likely your most valuable asset, and protecting it should be a top priority.
