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Making sense of mortgage foreclosures and bankruptcy

Published on November 30, 2022

Buying a home is one of life’s happiest events. And while this type of investment often creates wealth for the homeowners, it also, in most cases, involves a contract with a banking or lending institution. To protect their loans, these institutions have recourses available if the borrower fails to pay.

Let’s take a look at this issue, including mortgage foreclosure and bankruptcy, to understand their implications for the homeowner and the buyer.

Contents:

Foreclosure

A foreclosure is when a home is seized by the lender. This term applies only to properties with an existing mortgage. The homeowner who is unable to make the scheduled mortgage payments receives a notice from their financial institution or lender that they will soon own the property and be entitled to resell it.

A financial institution or lender can also seize a home for other reasons. The lender can protect the value of its guarantee in case of:

  • Negligence and deterioration of the property
  • Failure to pay property taxes
  • Failure to insure the dwelling

Before seizing the property, the lender will usually attempt to contact the borrower and find some middle ground to resolve and correct the situation.

The 60-day notice, or the notice of exercise

The notice of exercise of hypothecary right to take in payment, better known as the “60-day notice,” is a notice that the lender has published at the Bureau de la publicité des droits to make its rights to a given property known and recognized. This notice warns the homeowner to make the missed payments or reach an agreement with the lender or financial institution within 60 days of the time of publication of the notice of exercise at the Registre foncier du Québec (land register). If those conditions are not met, the lender’s rights will become applicable and the mortgaged property will have to be relinquished, and seizure procedures will be initiated. Two types or recourse can arise from this:

Taking in payment: The property itself constitutes a method of payment, after the owner voluntarily relinquishes it. The property is then seized by the lender, who then pays the fees such as electricity, taxes and maintenance. In such a case, the financial institution or lender keeps any profit resulting from the sale.

Judicial sale: The sale of the property is handled by an officer of the court, after a judgement is rendered in favour of a lender or financial institution having rights over the real estate good. The homeowner is then forced by the court to relinquish their property. In a judicial sale, the bank can also claim losses incurred from the owner whose property was seized.

Bankruptcy foreclosure

Unlike a mortgage foreclosure, a bankruptcy foreclosure puts an end to debts owed to all lenders. In such a case, even if the sale of the property doesn’t cover the full debt, the bankrupt owner cannot be sued for the difference. 

Consumer proposal

Also known as a proposal to creditors, this official legal procedure, overseen by an authorized insolvency trustee, allows a person to settle their debts by making a repayment offer to the financial or lending institution. One of the main advantages of this approach is that it allows the person to keep all their goods, including the equity on their main residence—provided they continue to make the required payments on the mortgage, of course.

Financing advisor discussing bankruptcy and foreclosure with a couple

The consumer proposal can extend over a maximum of five years and can cover up to $250,000 in debt (excluding the mortgage). For instance, if the proposal is accepted, it may:

  • Extend the repayment period for unsecured debts
  • Lessen the monthly payments
  • Forgive a portion of the defaulted payments
  • Drop additional fees
  • Etc.

This makes it possible to avoid putting the property on the market. It cannot be seized so long as the repayments are made in accordance with the agreement.

A consumer proposal is submitted after the homeowner’s financial situation is evaluated by the insolvency trustee, to prove that the homeowner is no longer able to honour their commitments. The trustee is also responsible for presenting the creditors with the best offer possible. If the lender refuses the offer, the debt must be paid according to the conditions established originally.

What are the impacts on a new mortgage or a mortgage renewal?

While an accepted consumer proposal protects property from the consequences of over-indebtedness, it can affect future mortgage payment agreements.

Mortgage renewal: If the homeowner was meeting the payment terms, they should be able to renew their mortgage with the same financial or lending institution without any issues. The decision will rely less on the credit rating and more on the person’s payment history and on the ratio between the values of the loan and the property. However, if making a request with a new lender, the borrower will certainly be impacted by their poor credit history. The lender will consider the mortgage to be high-risk. Therefore the terms offered by the new lender are likely to be less advantageous than those of the current lender.

New mortgage: The consumer proposal will remain in the person’s credit file for six years after it is submitted, or three years after repayment in full. After that time, the person becomes eligible to take out a mortgage, so long as they meet the qualifying conditions that apply to everyone.

Tip! If possible, repay the consumer proposal in full before taking out a mortgage, and do everything you can to rebuild your credit rating. Learn more about mortgages.

Certain conditions (notably, a down payment of 20% of the price of the property) may make it possible to purchase immediately after paying off the debts, but from a private lender. These private (or Type B) mortgage lender offer loans at higher interest rates to applicants who have been refused by Type A lenders.

Buying a property under mortgage or bankruptcy foreclosure

Sometimes, one person’s misery is another’s fortune.  Properties that have been seized due to a mortgage or bankruptcy foreclosure can end up on the market. 

How and where to find them

To find the best foreclosure deals, informed buyers can consult the Registre foncier du Québec to see the six-month notices. They can then contact the homeowners who are in default of payment to convince them to sell the property before it is seized. In fact, the most profitable foreclosures are often those that aren’t officially on the market.

Aside from the land register, there are tools that can be purchased to sniff out good deals as soon as a six-month notice is posted by a lender.

  • JLR.ca
  • Monprospecteur.com

Once a property has been seized by the lender or is put up for judicial sale, it will be listed on real estate sites or platforms like Kijiji.

Couple in front of a foreclosure house

A good investment idea?

While buying a foreclosed property can sometimes represent considerable savings, it’s not always a wise investment. When a property ends up on the market in this way, the lender will want to sell it for as close to its market value as possible, to recover their investment and the losses incurred during the seizure. The lender will thus take advantage of offer-and-demand forces to get the best price possible. This tends to make it unlikely that a property will sell at a very low price.

However, it can be an interesting investment when there is a significant difference between the property’s market value and the mortgage balance. This difference is known as the equity. The higher the equity, the more possibility of making a substantial profit. For example, if a property is worth $300,000 and there is $100,000 left to pay on the mortgage, then the equity is $200,000. 

Tip! A property that has been owned a long time before it is seized (without having been refinanced) runs the risk of having a good amount of equity.

Finally, potential investors must be cautious before taking action. They should also take into account the usual fees that must be paid for the purchase: notary, insurance, possible renovations, inspection, mortgage insurance (with the CMHC, for down payments of less than 20%), etc.

Pro and cons of buying a foreclose property

The legal impact of buying a foreclosed property

Foreclosed properties have one major weakness: they are always sold without legal warranty. The buyer therefore agrees to waive their right to sue the seller for hidden defects. In short, the purchase is at the buyer’s risk and peril. The buyer takes on the responsibility for all future work that may be needed.

It’s therefore critical to hire a certified building inspector to carry out a pre-purchase inspection. It is possible that the previous owner did not have the financial means to properly maintain the home and that some urgent renovations are required. An inspection will reveal the work that will be needed and the costs, so making the decision of whether or not to buy the foreclosed home will be done with your eyes open.

Person doing an inspection on a house before it is bought

The creditor, just like any seller, is required to disclose all known problems with the property in the Declaration of the Seller. However, since the creditor has not lived in the home, they may only have limited knowledge of the defects. 

What’s the right buyer profile?

Unfortunately, on the average, buying a foreclosed property is seldom a profitable choice because of the risks involved and the potential renovation expenses. 

It’s therefore better to have a certain amount of expertise and the financial means to invest in a property that needs renovation. Seasoned buyers and investors who have the time and industry know-how are often best positioned to purchase this type of real estate.

For most people it’s best to focus on other opportunities.

Need help with renovations and maintenance after buying a foreclosed property? Call on RenoAssistance and ProAssistance !

When selling a property, save the commission while getting outstanding visibility and support by using DuProprio’s services. Talk to our team or watch our webinar to find out more.

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