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Mortgage foreclosure meaning: a guide

Posted on 5 September 2022

Written by Chris Galea

The word ‘foreclosure’ can seem a little intimidating – you may have been threatened with a foreclosure by your mortgage lender, and are perhaps not entirely sure what it means. In this article, we explain the mortgage foreclosure meaning, and help you to understand what it may look like for you. We will also explain how the process of foreclosure works, and your options if you are being threatened with one. For instance, do you have any options during a mortgage foreclosure? Are you guaranteed to lose your home? Do you have to go to court? Do you still owe your lender if you go through a mortgage foreclosure? And how will your credit score be affected by a mortgage foreclosure? In this article, we explain all you need to know.

Mortgage foreclosure meaning – what is it?

Foreclosure is the legal process of a mortgage lender taking possession of a property after the homeowner defaults on their mortgage payments. It is the legal transfer of full ownership of the property to the mortgage lender. This happens when the agreements of the mortgage are not met, whether or not this means mortgage payments have been missed, there is insufficient insurance, or if property taxes are not paid. The homeowner gives up all their rights to the property, including any equity where applicable. The most common cause for mortgage foreclosure is a homeowner missing their payments. The mortgage lender will then wish to foreclose on the property in order to sell it and reclaim the funds they are owed. Of course, this can be a frightening situation if you are struggling to make your mortgage payments and are at risk of losing your home. Foreclosure is an expensive process for lenders, and can take time. The process usually looks as follows:

  • Your mortgage lender will file a Statement of Claim with the court
  • Once you have received this, you have twenty days to respond with a defence
  • Following this twenty day period if no defence has been received, your mortgage may be considered in default
  • Your mortgage lender will request a foreclosure order – if the court thinks you may be able to become current on payments, they can issue a Redemption Order. This gives you a period of time to become current with your payments, usually around six months. You can request a longer period of time, and your lender can ask to reduce it

Everybody wants a win in this scenario – you want to keep your home, your lender wants the money they are owed, and the court will try to mediate a situation that works for you both if possible.

What are my options if I am behind on my mortgage payments?

Thankfully, you do not automatically lose your property if your mortgage lender begins the process of a mortgage foreclosure. Here is a summary of your options should this happen to you:

  • Do not act. If you choose to do nothing, your lender will pursue legal action against you and you will likely lose your home. You will be able to claim any equity in the property once your lender sells it, although you will need to cover any associated legal and sale costs. If your property sells below the market value, you could be sued for any remaining balance. Equally, if there is a deficit between the property sale price and the outstanding mortgage, interest, and fees, your lender may be able to ask you to cover any shortfall.
  • Negotiate with your lender. If it is possible for you to catch up on missed payments, you will want to do so by communicating with your lender. You may even need additional time to refinance your mortgage through a broker or another lender in order to lower your overall payments or interest rate while you try to catch up on missed payments. You should also see where else you can bring in extra income or reduce your expenses where possible.
  • Find a new lender. If you cannot negotiate with your existing lender, you may want to get a payout figure and look at a new mortgage with a different lender. Often, private mortgages will come with a higher interest rate, but it can be worthwhile if you have equity in your home.
  • Sell your property. If you wish to sell your property yourself, you need to do so before the bank proceeds with a mortgage foreclosure. Although not an easy decision, it may the best thing for you financially, and you can look to purchase a property in the future when your finances are in a better place. This is often the best decision to get a higher price than your lender, or if you believe there is equity in the property that you will want to retain.
  • File a consumer proposal or bankruptcy. If you are struggling to make your mortgage payments because of other debts on your plate, filing either a consumer proposal or bankruptcy can help you to get your finances in order and allow you to more manageably own a home.
  • Fight for your home. While you may need a lawyer, you could choose to go to court and fight to keep your home. This is certainly not the easiest pathway, but you could potentially end up being able to keep your home.

 How can a Licensed Insolvency Trustee help with mortgage foreclosure?

Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. They will help you to review your financial circumstances and will advise you on the best debt relief pathway to take. Gaining debt relief on your unsecured debts may free you up to more easily make payments on your secured debts, including mortgages and car loans. This could allow you to keep your home, and avoid mortgage foreclosure. At Spergel, we have helped over 100,000 Canadians on the pathway to debt relief. Consumer proposals can reduce your debt by up to 80%, while enabling you to keep your assets. Bankruptcy, on the other hand, is a more drastic measure but will completely clear your unsecured debt and allow you to begin a fresh financial future. Another advantage of gaining legal debt relief is a stay of proceedings. When you file either a consumer proposal or bankruptcy, a stay of proceedings is automatically triggered to offer full protection from collection agencies and creditors. This puts a stop to harassing visits, letters, phone calls, and threats. You should contact a Licensed Insolvency Trustee as soon as possible to begin your journey to debt relief.

Does declaring bankruptcy stop mortgage foreclosure?

Unfortunately, filing for bankruptcy or a consumer proposal will not stop a mortgage foreclosure. This is because both forms of debt relief clear unsecured debts, while a mortgage is a secured debt. This means that despite clearing your unsecured debt, it will not affect your secured debt. The primary way to keep your home during a mortgage foreclosure is to stay current on your payments. Many Canadians, do, however, find that clearing their unsecured debts makes it much easier for them to make their mortgage payments. Filing a consumer proposal or a bankruptcy can also help to protect you from any shortfalls or deficiencies you may need to pay following the foreclosure. A shortfall is actually an unsecured debt, and so it can be covered when filing either form of debt relief. For these reasons, they are a great option for many Canadians.

How does mortgage foreclosure affect your credit score?

Mortgages are reported to the credit bureaus, which does mean that mortgage foreclosure affects your credit score negatively for a number of years. If your mortgage lender additionally pursues legal action against you to reclaim a shortfall following the sale of your home, your credit score is likely to face a negative impact once again. Most Canadians who have faced foreclosure will have to wait around seven to ten years before their credit scores begin to improve. There are, however, ways to rebuild your credit score.

What is the difference between mortgage foreclosure vs power of sale?

During a mortgage foreclosure, the mortgage lender takes on the legal right to the property. In this way, any profit from the sale – including any equity – goes to the lender. The lender is not able, however, to sue for any shortfall there may be between the sale price and the total cost following legal and sale fees. For this reason, the mortgage foreclosure process can prove to be long and expensive. More commonly in Canada, you will come across a power of sale. This is another way of collecting on outstanding mortgage payments. In this scenario, a mortgage lender will go to court to gain permission to evict the homeowner from the property, most often in order to sell it. The process is outlined in the name – the power of sale. The outcomes of a power of sale vs foreclosure are different. In a mortgage foreclosure, the profits of a sale go to the lender, but in a power of sale these will go to the homeowner.

Want to know more about the mortgage foreclosure meaning? At Spergel, our team of experienced Licensed Insolvency Trustees have been helping Canadians to keep their homes for over thirty years. Book a free consultation with one of our team to discuss your financial circumstances and the best way of handling your debt while keeping your home.

Chris Galea

Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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