Life is pretty much unpredictable. And the value of a house in Canada can be overwhelming, especially for properties in high-demand regions. In light of this, a lot of homeowners find it difficult to pay up their mortgage fees and, sooner or later, get their homes foreclosed.
A foreclosure could also occur if a homeowner is caught up in criminal acts, bad lifestyle, and other abominable conditions that could warrant a forceful removal from their property.
Regardless of the reason for a foreclosure, the lenders who own the right to keep possession of the property need to use the said property to recoup part of the losses. As such, the foreclosed homes may be listed for sales again. So you can buy foreclosed homes Canada again, and this time — complete all the payments.
Home foreclosure in Canada — the process
Home foreclosures are a common phenomenon. Lenders like banks and many others usually come up with the idea of foreclosure as a way to help the borrower make prompt payment; but, most lenders do not subscribe to the process of foreclosure.
Truth be told, it demands more cost and time, as it involves the intervention of a court of competent jurisdiction, auction sale, or listing at a lower price than intended resulting in a profit shortage.
Most times, the title of the home in question is not revoked until after four mortgage defaults (120 days); although, this process may differ depending on the law being used in the concerned province or lender.
After the home foreclosure, borrowers are given a grace period of 30 to 35 days to hand over or leave the premises.
During the period the foreclosure is still under review, most lenders still give room for negotiation, and if a borrower convinces the lenders or deems it fit to start making payment again, there is a likelihood of being reconsidered. But, if the lender is not confident of the bargain by the borrower, they can go ahead with the foreclosure and put it up for sale in either of these two ways:
This is a frequent scenario in British Columbia, Quebec, Alberta, Saskatchewan, and Nova Scotia, where the lenders approach the competent judicial court to request permission to go on with the sale of the property. The major setback of this process is the money and time it demands due to the extended court sessions and compulsory legal fees.
In rare scenarios, lenders in these provinces can choose to begin the foreclosure process right away after the first payment default. Once this happens, a court notice called “Statement of Claim for Debt and Possession” will be issued to the borrower and will have a period of 20 days to respond through a “Statement of Defense”
In situations where the court presides and the borrower loses the case or fails to respond via a Statement of Defense, the court will proceed to permit the lender to continue with the property sale.
Sometimes, the period of the judicial foreclosure process can last up to several months or a year. After the conclusion of the process, the lender is at liberty to put up the property for sale or request the service of a real estate agent or auction. A significant ratio of the proceeds after the sale will then be utilized to recoup their legal fees.
Power of Sale
This is described as a scenario where a clause in the mortgage contract spells out the right of the lender to proceed with a property sale without going through judicial proceedings. This requisite is popular in Newfoundland, Ontario, P.E.I, and New Brunswick.
Usually, the time for the beginning of the process is after 4 defaulted payments; however, there is still room for a 35 day redemption period where the borrower can still make up for the defaulted amount, outstanding tax arrears, late penalties, and fees related to the Power of Sale.
If afterward, the borrower could not meet up with these payments, an eviction notice will be sent and will be given 30 days to quit the premises.
As with other sale options, there is a likelihood the lender engages the service of a traditional real estate agent or opts for auction. On the other hand, one way to recoup the unpaid mortgage balance will require them to sell at the highest price possible.
Pros and Cons you need to know before you buy foreclosed homes Canada
As discussed earlier, home foreclosures and selling of foreclosed homes are not common in Canada unlike in the United States with a higher occurrence. Having said that, lenders still go with the option, and there are some precepts you should keep to buy a property that’s been foreclosed, other than the traditional mortgage procedure.
However, before you begin the journey of buying a foreclosed home, it is pertinent to acquaint yourself with the benefits as well as risks entails.
- As a way to recover any current or potential loss on the property, the lender will be in haste to sell the property as fast as possible. The property may even go for a price lower than the initial value. And if you are buying foreclosures at auction, it is possible you get it at a lower price.
- Any lien, tax arrears, or unpaid mortgage payment will be wiped out, as these factors would make it difficult for the lender to resell the foreclosed house.
- This alternative is advantageous to the landlord with plans to purchase and improve cheap houses and then sublet.
- If the foreclosed home is being sold at a cheaper cost, the quota saved could be used for maintenance or to improve the house, thus giving the property an increased market value and being able to sell for more at a later time.
- Even though foreclosed properties require lower outlay, they are usually not the best bargain as many people opined. Sometimes, the difference between the listed price and the original price is usually insignificant.
- Canada’s real estate market is very stiff, if the property is situated in a desirable location, chances are that another seller outsmarts and beat you to it. If not, the price of the house is exorbitantly high which may even skyrocket at the end of the sales.
- Buying a foreclosed home requires more strict and complicated financial and legal procedures compared to regular home sales. The sale of a foreclosed home usually follows a “what you see is what you get” condition, that is, all repairs, renovation, and related expenses solely lie on the buyer. It is also your responsibility to evacuate any possession left behind.
- However, if the terms of the mortgage contract state otherwise regarding any of these responsibilities, the lender will be pardoned from any current as well as future expenses that may arise on the property. Perhaps issues relating to foundation, hydroelectricity, or zoning occur, there will be no cover for them.
- The hours for property visitations (before purchase) are more restraining. If the home is not in good structural condition or there is a power outage, a realtor accompanies you to the house and only permits you to inspect the home during these certain hours.
Also bear in mind that land transfer tax is another expense you will cater to; that is:
- 1% for properties below $200,000
- 2% for properties below $2,000,000
- 3% for properties above 2,000,000
Planning to purchase a foreclosed home
Now that you are familiar with various benefits as well as shortcomings associated with buying a foreclosed home, the next step is to outline ways to finance it, especially if you prefer to fund it from an external source.
Please take note that going for a home that is being foreclosed poses more risks than buying a regular home. This makes it expedient for proper preparation when the mortgage application is close to conclusion. You may need to consider the following precautionary measures;
Require professional assistance
Practically, the price tag of the foreclosed home may be low, but deep down; some issues may be in disguise. Endeavor to inquire the service of a professional financial and real estate expert to ascertain the foreclosed property is a wise decision to take.
Make sure they spell out all cost implications as well as the risk involved. Does buying a foreclosed home have more advantages than a regular one? If this is true, going for the purchase may not be a wise decision.
Employ a Realtor (yes, it’s worth it this time)
Since purchasing a foreclosed home requires technicalities, going through the route with a professional realtor contributes immensely to the success rate of the bargain. Apart from assisting you to get the right property, they also guide and ensure the smooth progress of the entire process. Inspection and court dates are other necessary steps you should take. Luckily, these are provisions many lenders include without additional cost.
Endeavor to carry out property Inspection and Appraisal
One easy way to nail a profitable foreclosure is to inspect and appraise the property based on the existing value. Although, the lender includes this as part of the process; however, paying for your own helps you affirm you are putting your money into the profitable property and not a shallow end.
Have a budget (the point many people miss out on)
You should keep abreast of the high-cost implication of opting for a foreclosed home. Bear in mind that the present state of the house might require renovations before it can be livable. If all these payments are beyond your budget or financial capability, it’s advisable to hold off till you get a property that fits in your budget. Other related expenses to take into consideration include;
- Utility that requires to be kept running (gas, water, electricity, and heating)
- Replacing the locks
- Sanitation and overall maintenance
- Renovation (in case there is any)
- Taxes attributable to Property and land transfer
- Landscaping (if needed)
- Furniture and Appliances replacement
- Interest rate and any associated administrative fee
- Required titles or permits (porches, garages, additions, etc)
- Additional damage that may happen between the time of inspection and the time of possession
Arrange for the processing of the application
One can say that auction is a regular way to buy a foreclosed property, using a legitimate real estate company is most times the safer way. Despite these, every conventional mortgage does not take the approval process with levity. You have to be grounded because your credit and finances will be subjected to inspection.
These are few things you need to do to tidy up your creditworthiness;
- Keep all required personal/financial documents organized and updated
- You need to ditch down any other outstanding debts
- Maintain a good credit (in terms of report, rating, score, and history)
- Offer a substantial down payment
- Calculate a feasible payment plan that suits your finances.
Your credit score is important when you buy foreclosed homes Canada
Even if the asking price of the foreclosed property is considerably low, the amount will certainly not be a chicken feed. Therefore, saving as much as possible would still be an advantage in order to help make subsequent mortgage payments stress-free alongside any other personal expenses.
This is achievable if you get an affordable interest rate for those payments, which is only granted when you have a good credit score prior to the loan application.
Credit scores in Canada are denoted by numbers, ranging from 300 to 900. Any score above 680 is an indication of good credit and this will prompt your lender to approve the financing request with a good interest rate.
Although, it is still possible you secure financing if you have a lower credit score, however, just know the effect will increase your interest rate. So, if you increase your credit score and do all you can to improve the look of your credit report, getting financing for your new mortgage will be a smooth transition.
After this, the faster you complete prompt payments of your mortgage, the better the look of your credit score and chances of getting financing with a good interest rate when you are applying for subsequent credit products.