It’s every home-owner’s worst nightmare. Already drowning in debt, and with a rampaging cost of living crisis causing many families to barely be able to make ends meet, they get a notice from their mortgage company that says something to the effect of:
You have 30 days to pay back your entire mortgage balance in full, or we’re taking your house. Have a great day!
Sound like a bad dream? Like something that would never happen here in Canada? Well, I got bad news for you:
I have to admit, even I was surprised that this was even possible. In my head, if you still have a job, and you’ve kept up to date with your mortgage payments, the bank can’t just foreclose on your house like that.
And the reason why this is happening is that these aren’t technically foreclosures. They’re called power of sales, and this is how they work.
Say you’re a mortgage company that gave out a mortgage on a $1,000,000 property in, say, early 2022. Then interest rates shot up over the course of the year. Depending on the type of mortgage this was, the mortgage holder may or may not see their monthly payment change, but regardless when the mortgage comes up for renewal, the property is now worth considerably less on the open market. The Toronto housing market has seen an average decline of about 20%, so let’s say this property is now worth $800,000. But the outstanding mortgage is still way more than that, say, $900,000.
It’s completely up to the lender whether they want to renew your mortgage for another term. In the above scenario, they might look at your salary, your credit worthiness, and the fact that you’ve kept up your payments so far and approve you for renewal. But if there’s anything different about your financial situation, like a change in job status, or if they’re simply feeling spooked about whether the house may fall in value even further, then they may reject you and demand the entire mortgage balance back all at once.
The big difference between a foreclosure and a power of sale is that technically, the borrower hasn’t done anything wrong. A foreclosure requires the borrower to miss multiple payments and ignore repeated requests from the bank to comply with their lending obligations. In a power of sale, the borrower may lose their house simply because their bank doesn’t think lending to you is a good bet anymore.
Is this fair? Not really. Again, the borrower didn’t do anything wrong here. But is it legal? You betcha. If you don’t own your home outright, stuff like this can always happen because nobody “owes” you a loan. Being able to borrow money isn’t a right, and if the bank, for whatever reason, no longer wants to keep lending you money, they can stop renewing your loan. That’s their right as a lender.
This isn’t to say that the bank can do this at any time, however. In Canada, our mortgages are generally amortized over 25 years, but that amortization is split into terms of generally 1-5 years, with 5-year terms being the most popular. Within a mortgage term, as long as you play by the rules and keep up with your payments, the bank has to play by theirs. But when the term is up, they can renegotiate the next term however they want, including not renewing your mortgage at all.
That’s why the period when mortgage terms are up for renewal are the most dangerous during a time of rising interest rates and falling house prices. That’s when they can really screw you.
This is a common question for homeowners who have fallen behind on their mortgage payments. The prospect of losing your home to the bank can be scary and overwhelming. In most cases, banks cannot simply show up and take your house if you default on your mortgage. However, they do have legal options to eventually foreclose and force a sale of the property to recover what they are owed. Here is an overview of the foreclosure process and when a bank can legally take your house.
How Does Foreclosure Work?
Foreclosure is a legal process that allows the lender to repossess and sell a property when the homeowner falls too far behind on payments. There are three main types of foreclosure:
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Judicial foreclosure This is the required process in roughly half of US states. It involves filing a lawsuit and getting a court order to foreclose. Typically takes longer than non-judicial foreclosure.
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Non-judicial foreclosure The lender can foreclose outside of court in these states. Usually a quicker process with less homeowner protections.
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Strict foreclosure: The rarest method. The lender takes ownership of the home without a sale. Homeowner has no right of redemption.
The foreclosure process formally starts when the lender records a notice of default with the county. This is usually filed after 3-6 months of missed payments. The homeowner will get notification of the default and has a chance to pay the past due amount or work out an alternative repayment plan.
If the default is not resolved, the lender will proceed with setting a foreclosure sale date. This must be publicly announced. The homeowner is still able to avoid foreclosure at this point by paying off the full loan balance and fees. Once the foreclosure sale takes place, ownership transfers to the winning bidder, usually the bank.
How Long Does Foreclosure Take?
The length of the foreclosure timeline varies:
- Non-judicial foreclosure states: 4-8 months on average
- Judicial foreclosure states: 9 months – 2 years on average
Factors impacting the foreclosure duration include state laws, court backlogs, loan type, lender workload, and attempts to modify the loan. The overall process takes significantly longer for judicial foreclosure. However, non-judicial states provide fewer protections for distressed homeowners.
Can the Bank Change the Locks or Remove Belongings?
Banks cannot legally remove property or change locks on a home until the foreclosure process fully completes with a sale. The homeowner retains ownership and has rights to live in the property and keep possessions there until that point. If a bank representative attempts illegal seizure earlier, you should seek legal counsel.
However, it is possible in some states for the lender to request an eviction order after the foreclosure sale. This would require the prior owners to leave the property, at which point their belongings could be removed. Typically, the new owners must provide proper notice before disposing of any left behind possessions.
What Options Does a Homeowner Have?
Homeowners facing foreclosure do have options to avoid this outcome:
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Loan modification – The lender agrees to modified terms, which often include lower interest rate and/or extended repayment term.
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Forbearance – A temporary reduction or suspension of payments. Allows time to improve finances.
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Repayment plan – Allows gradually catching up on the missed payments.
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Refinancing – Getting a new mortgage with better terms.
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Selling the property – Homeowner arranges a short sale to pay off the mortgage.
To pursue these options, it is critical to contact your lender as soon as you anticipate falling behind on payments. Timely action gives more opportunity to find an alternative solution.
Can Filing Bankruptcy Stop Foreclosure?
Filing for Chapter 13 bankruptcy will pause any foreclosure action. This gives breathing room to work out a payment plan or loan modification. However, it’s important to understand bankruptcy does not eliminate mortgage debt. You still have to make payments in a way acceptable to the lender.
Chapter 7 bankruptcy does not stop foreclosure proceedings. The home may still be sold to pay the mortgage. Of course, always consult a bankruptcy attorney to explore if it could benefit your specific situation.
Is It Possible to Redeem Your Home After Foreclosure Sale?
In many states, homeowners have a post-sale redemption period ranging from 10 days up to 1 year. During this window, the homeowner can regain ownership by repaying the full amount owed, including foreclosure costs.
The redemption laws vary considerably by state. And the foreclosing lender may or may not be obligated to inform you of this option. If interested in pursuing redemption, act as quickly as possible and seek legal guidance.
Key Takeaways
While daunting, it’s good to remember that banks cannot simply seize your house without completing the foreclosure process. This takes months or years. Homeowners have options to avoid foreclosure or redeem their property for a period after the sale. Being proactive with your lender and seeking help from housing counselors and attorneys can be invaluable in protecting your rights and assets during a mortgage default situation.
Strategies To Cope (or Vultch)
On the home-owner side, if you’re about to close a sale and contemplating what type of mortgage to get right now, avoid variable rate mortgages. Those have really screwed people over this past year as interest rates have risen and put way too many borrowers at risk of having their homes taken away from them. Stick with a standard, vanilla fixed-rate mortgage, and don’t monkey around with trying to shorten the length of the term in order to get a slightly lower rate. The less often your mortgage comes up for renewal, the less likely you’re going to run into this problem.
If you already have a mortgage and find yourself coming up for renewal soon, save up as much cash as you can just in case the renewal goes south. If that means delaying major purchases, selling your car, or forgoing family trips, that’s a sacrifice you should seriously consider making. Having access to a wad of cash puts you in a much stronger position at renewal time, because you can pay down at least part of the balance and (hopefully) get your debt levels down to somewhere your bank would be comfortable lending to you again.
And if you find yourself staring at the above mentioned “give us our money or we take your house” notice, unfortunately your options are very limited. Going through a power of sale puts you at a severe disadvantage, because the bank will try to sell your house as quickly as possible to recover the amount they’re owed rather than try to get the best price for your property. In all likelihood, this will leave you with all the money you paid into the mortgage gone, and with no house to boot. If you need to raid your retirement savings, get a second job, or crawl on your hands and knees to your in-laws, then that’s what you’re going to have to do.
On the other hand, if you’re on the buyer side, this might be an opportunity to pick up a house at a severely discounted rate. During the 2008/2009 Great Financial Crisis, the only ones that came out on top of the US housing market crash were people who had the cash and the good timing to pick up distressed real estate while they were on fire-sale. This might be your chance. Check out Kijiji for listings that look like this:
A good rule of thumb is that the more capital letters and exclamation points in the listing, the more desperate the seller is. One man’s trash is another man’s treasure, and in this case, one man’s financial armageddon might be your ticket to home ownership. Just be prepared to wear Kevlar to the showing.
If My House is in Foreclosure, Can the Lender Take Money from My Bank Account?
FAQ
Can the bank seize your house?
If you do not make your mortgage payments, your lender can take your home. The process they use to take your home is called foreclosure. This is the legal process they use to recover the balance of the loan when a property owner fails to meet the obligations of the loan.
What happens if you owe the bank money and don’t pay?
Can a bank take away your mortgage?
If you can’t repay the mortgage, your lender can take possession of your property and sell it to collect any money you owe them. What’s the difference between mortgage amortization and mortgage term? Mortgage Amortization period is the length of time it takes to pay off a mortgage, including interest.
Can a bank put a lien on your house?
A lien is a legal claim against a property. If you are advanced in your mortgage, your lender may put a mortgage lien on your house so that your lender has the right to reclaim your property if you default on your payments. It’s not just banks or other financial institutions that are able to put liens on houses.