How Foreclosures Work in Canada

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How Foreclosures Work

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If you own a home, a foreclosure is likely one of your biggest fears. Financial crisis, some violation of a mortgage agreement, or quick forced relocation can lead to foreclosures for homeowners. We all have a vague idea of what a foreclosure is and what it means, but do you truly understand the mechanics of a foreclosure? How do foreclosures really work and why are they different in Canada and the US?

There is a lot of terminology used for pretty specific things in real estate and foreclosures. When dealing with such a stressful life event, you're going to want to know exactly what everything means when it is said to you. Let's define some common terms you may hear when dealing with a foreclosure.

Foreclosure terminology 

Foreclosure: The legal process where a bank or lender takes legal and financial control of a property due to unpaid mortgage payments by the borrower. Generally the forced public sale of the property is used to cover the costs of the unpaid debt and the legal fees. Obviously, the original borrower is evicted to make the sale possible.

Mortgage: 
A legal document that states that the borrower's property is collateral for the debt that gets paid back by the borrower. Basically, it means that the bank/lender owns a home until it is paid off completely by the resident. They can also stipulate some restrictions on the property.

Lien: A legal claim on a property that needs to be paid off when the property changes hands. Mortgages are one type of lien.

Home Equity: 
The positive value of a resident's ownership of their home after all expenses, including liens and debts, are subtracted. Your equity goes up if you make mortgage payments or the value of your home increases. It goes down if you miss payments, acquire new  liens, or if the market value of your home decreases.

Principal: 
The amount of money that was lent and not paid back. This does not include interest. Gradually you will decrease the principal as you pay off your mortgage.

Redemption Period: Typically, six months after the foreclosure process starts when a borrower can either pay off the mortgage completely, (usually by selling the home himself) or refinance the mortgage so that they can make payments again.

Interest: A fee for borrowing money from a lender. As you gradually pay off your principal, you are required to pay an extra fee for having borrowed money for such a long period of time. The interest rate on a mortgage is usually determined by how risky the lender feels the loan they gave you is. If a lender feels that you are unlikely to fully pay off the loan in a timely manner, the interest rate they ask for will be higher.

Fixed Rate Mortgage: A mortgage where the interest rate remains the same throughout the life of the mortgage.

Adjustable Rate Mortgage: 
A mortgage where the interest rate fluctuates after a certain period of stability depending on the market index. This is generally a cheaper deal since there is more risk placed on the borrower.

Fair Market Value:
The value of a property given the current housing market in its area. It is the highest a buyer would reasonably pay for the home and the lowest a seller would reasonably sell the home for. 

Default: 
Not paying back a loan. You are in default if you fail to pay off your mortgage. This can lead to a foreclosure.

The process

Foreclosures are almost always the result of defaulting on mortgage payments. It takes months of not paying to really get a lender's attention. When the foreclosure process starts, the six-month long redemption period is a good time to really assess your finances and see if you can refinance your mortgage to avoid being evicted from your home. 

If you still can't pay for your mortgage at this point, foreclosure is unavoidable. The lender takes control of your home either on their own or with a court order. They now need to try to sell your home to someone else to recoup the losses they incurred because you did not pay back their loan. 

The Canadian difference: Unlike the US, where foreclosed homes usually sell at substantially discounted prices, Canadian law requires that lenders sell foreclosed homes at fair market value. This means that the borrower is protected from having to pay large amounts of money to the lender out of pocket in addition to the low -priced sale of the property. There still could be a financial deficiency after the sale, but it will not be as severe as it usually is in the US.

Once you lose possession of your home and the lenders get all of their money back from their sale and/or you paying them, the foreclosure process is over. You need to find a new, more affordable place to move into. Obviously, being out of a home and maybe out of some money is not an enviable position. Knowing how foreclosures work and why they happen can help you avoid this unfortunate situation.

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on July 10, 2014

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