A foreclosure occurs when the current tenant of a home is unable to keep up with their monthly mortgage payments, thereby defaulting on their loan. In this case, the lender is able to force the sale of the home in order to recover the loan balance. Although foreclosures are less common in Canada than in the US, they do still occur. It is important to note that power of sales are more common in Ontario than foreclosures. If you are looking to purchase a foreclosed home, it is important to first familiarize yourself with the foreclosure process.
Under a foreclosure, the lender will take ownership of the home’s title. This means that the lender now has complete legal ownership of the home, and is free to use the property as they please. To begin the foreclosure process, the lender must petition to the judicial court in order to be granted approval. This process, known as a judicial sale, is most commonly launched after a few months of missed payments.
The judicial sale is a lengthy and expensive process, designed to help the borrower fight for their right to the home. If the borrower loses the court case, they are afforded a 30+ day redemption period during which they can pay back their owed balance and retain ownership of their home. If at this point the payment is not made in time, the borrower forgoes all rights to the home, and the lender is not required to pay back any profits made from the sale of the home. The lender also takes the risk that if they do not recuperate their full investment and fees, they are not able to seek additional money from the borrower in a foreclosure. The borrower is also not entitled to receive back any of their equity and cannot sue their lender in this regard.
If you live in Ontario, and a few other provinces, lenders are still entitled to perform foreclosures, but often opt for a different process known as power of sale. The power of sale process is a faster process in which the lender only acquires the legal right to sell the home, not complete ownership of the property. Unlike the foreclosure process, obtaining the right to put a defaulted borrower into a power of sale tends to be a much simpler and quicker of a process than a foreclosure would be in Ontario.
When a home is sold under power of sale, the lender is legally obligated to sell the home at fair market value and must pay back any profits to the borrower which would enable the borrower to get compensated for any available equity. There is also a 30–45-day redemption period in which the borrower is afforded the chance to pay back their outstanding balance. Once the lender makes back the loan amount, any additional profits made from the sale of the home must be awarded back to the borrower. Unlike a foreclosure, the borrower is allowed to sue the lender for shortfalls in their payment and vice versa. If the lender comes out short, they can then sue the borrower for any outstanding amounts.
You can easily set yourself up for success when buying a foreclosed home, as long as you are well-prepared. One of the first steps you might want to consider is hiring a realtor. While you may not always need a realtor to put down a traditional offer, buying a foreclosed home can be a more complicated process and an experienced realtor can be a great help. You could also consult with a Clover Mortgage broker to determine whether buying a foreclosed home is a good idea for you, and what the process would entail for your specific needs.
Another important consideration will be your budget. You should aim to prepare enough down payment, pay down your existing debt, and correct your credit score before beginning your application. However, before beginning the process, it is wise to have a general idea of how much money you should put aside. Here are some of the lesser-known fees and costs you may want to keep in mind:
If you have researched the foreclosure process, familiarized yourself with all the costs, budgeted accordingly, consulted a realtor, and consulted an experienced mortgage broker, the only thing left to do is to make an offer. Making an offer can be a scary process, especially given the competitive nature of the current market. However, by this point in the guide you should be equipped with some helpful the information you need to help you succeed.
Given the nature of foreclosed home sales, you may have to act faster than usual to secure a sale. Sometimes, lenders will reduce the price of the home or cover certain closing fees to get the property sold as quickly as possible. Given these advantages, there is a hot market for foreclosed real estate in Canada, and bidding wars may not be entertained for longer than a day or two if many offers are flooding in.
The best way to increase your odds of a successful offer is to come in prepared with a pre-approval. Here at Clover Mortgage, we offer pre-approvals and pre-qualifications across our vast network of 70+ lenders, and can help connect you with the best mortgage terms, and lowest interest rates that we have available for you. By obtaining a pre-approval, you can know with a high degree of certainty how much mortgage you can afford, which allows you to make more accurate bids. Having a pre-approval also gives sellers greater conviction in your ability to close the deal, leading to a higher likelihood for having your offer accepted.
For more information, check out our guide on mortgage pre-approvals, or contact us today to book your free consultation!