Foreclosure

Foreclosure scares people because it means they may lose their house. But if you face foreclosure, you may still be able to help yourself if you understand what it is and how it works.

What is foreclosure?

Foreclosure is a legal action that a moneylender can take if a person who borrowed money using a mortgage stops paying back the mortgage. Foreclosure allows the lender to take or sell the person’s house by first getting a court’s permission to do so.

What is a mortgage?

A mortgage is a contract between a borrower and a lender to repay a loan. It gives the lender some assurance that the borrower will pay back the borrowed money. When you get a mortgage to buy a house, you borrow money from a person or company and you promise to pay back that money, usually with interest and in regular payments. The lender makes sure you will repay the loan with a mortgage, or charge, against your house, registered at the Land Title Office. You may have the right to pay off the mortgage and get the charge on your house removed—some mortgages allow that. For more on mortgages, check script 408, called “Mortgages and Financing a House Purchase”.

What if you miss a mortgage payment or make a late payment?

Following a missed or late payment, you are unlikely to automatically lose your house. Lenders don’t want to foreclose if they don’t have to because it is expensive and takes time. A lender will likely not start to foreclose until 2 or 3 months after you stop paying. Normally, a lender will first send letters demanding payment. Then, if you don’t reply, the lender will often start to foreclose and sue you at the same time.

If you have a short-term problem, like a temporary layoff, you may be able to make a deal with the lender to make smaller payments for a time, and add the amounts you fall behind to the total amount of your mortgage. Or, you may be able to make smaller payments for a while and a larger catch-up payment later. Most lenders would rather make some sort of deal and keep the mortgage in good standing, instead of starting expensive foreclosure proceedings in court.

The law tries to help you if you have a good chance of paying what you owe and if you try to get your finances in order. Only in the worst cases are you likely to lose your house and any equity you’ve built up in it. Equity is the amount that your house value exceeds your mortgage loan and any other debts that other lenders have registered against your house.

If a lender starts to foreclose, what happens first?

If there’s a Supreme Court Registry where your house is located, the lender must start legal proceedings there. You will receive a document called a “petition for foreclosure”, which is the lender’s notice to you that they are commencing a legal action in court to get back the money they loaned you with the court’s assistance.

What if you receive a petition for foreclosure?

Get legal advice right away. If you want to protect yourself and take part in the court proceedings, you must file a Response to Petition (with supporting affidavits) within 21 days of getting a petition for foreclosure. You must file the Response at the court address shown on the petition. You must also deliver 2 copies of your Response to the lender. Once you do this, no one can take any steps in the foreclosure without notifying you. If you don’t file a Response, the foreclosure will go ahead without you, and you won’t be able to protect yourself. After you file the Response, you will get a document called a Notice of Hearing, which tells you when the lender will ask the judge for an order nisi (a type of non-final order) to start the foreclosure.

What happens at the hearing?

The court will give the lender an order nisi, but in most cases, it will also give you time to redeem the mortgage by paying the full amount you owe, plus interest, costs, and taxes. This time is called the redemption period and it’s usually 6 months. But sometimes, the lender will ask the court for a shorter redemption period. The court can make an order to sell your house at any time, including at the order nisi stage. Once the court makes an order nisi, you cannot reinstate the mortgage on your own. You could do that only if you got the lender to agree.

One good reason to attend the court hearing is to ask the judge for as much time as possible to get the money to pay off the mortgage or sell the house. If you need more time, you can ask for an extension. If you ask for a long redemption period or an extension, the court will want to know what you have done to pay off the mortgage and what chance you have of paying the mortgage or selling the house on your own or through your own real estate agent. You should use a lawyer in this case because a lawyer can advise you on your options, including possible refinancing, even with another lender.

When the redemption period ends, the court can give the lender a final order of foreclosure—see the section called “The lender can apply to court for an order absolute” below. Or, the lender can ask the court for the right to have their own real estate agent list your house for sale. If there are other people or companies with a charge against your house, besides the lender who started to foreclose, they may ask for the right to sell your house. If the court gives the lender or anyone else the right to sell your house, it gives them conduct of sale, meaning the lender takes control over selling the home. If this happens, you cannot sell the property yourself. If anyone asks the court for conduct of sale for your property, you should ask the court to give you exclusive conduct instead. This means that only you are in charge of selling it. Alternatively, you can ask the court to give you at least joint conduct with the other person or company, so you have some control over the sale.

Two things you can do in the redemption period

1. You can pay off the lender that started to foreclose. To get the money for this, you can try to borrow from another lender or a relative, at a lower interest rate or over a longer repayment period. Doing so will allow you pay off the first mortgage and lower your monthly payments. However, this may be difficult, as most lenders look at your income to decide whether to give you a mortgage and your income may be what stopped you from paying your current mortgage in the first place, resulting in the foreclosure.
2. You can try to sell the house, preferably using your own real estate agent. Invite several experienced real estate salespeople who do business in your area to look through your house and tell you what they think it would sell for. Be honest with them about your situation, then choose the realtor you trust the most or feel most comfortable with. If you sell the house, you can use the money from the sale, first to pay any property tax you owe, and then to pay the mortgage and other charges registered against the title, including court costs. If there’s any money left over (equity), you keep it. But if the money from selling your house doesn’t completely pay off all the lenders, you may have to pay them the difference. Meanwhile, if the lender or anyone else with a charge against your house gets an offer to buy your house, they can apply to court for an order authorizing that sale.

What if you have no equity in your home?

If you owe more than you can sell the house for, you will probably want to get out of the situation with as little expense and trouble as possible. However, you should still take action instead of ignoring the problem. You may want to work with the lender to minimize costs by agreeing to the foreclosure. Normally, you would only do this if the lender will give you a full release from your mortgage, meaning you won’t owe the lender any more money. If the lender won’t agree to this, you can simply let the foreclosure proceedings go ahead and use the time as a rent-free period to get your finances back in order. If any other people or companies with debts registered against your house are not paid from the money from selling your house in the foreclosure, you will still have to deal with them. Otherwise, they can sue you for any money you still owe them.

The lender can apply to court for an order absolute

The final order for foreclosure is called an “order absolute,” and it comes after the redemption period ends. If the lender applies for an order absolute and the court grants it, the house then belongs to the lender and you must leave it. Further, you lose all rights to the house. You will no longer owe the lender any money, but if anyone registered a debt against your house after the mortgage, (for example, if you have a second mortgage) you’ll still owe that money. In exceptional cases, you can apply to the court for relief from losing your house if you can pay the balance in full. Then the court can order the lender to transfer the house back to you.

If the lender gets an order absolute

If the lender gets an order absolute, and registers title in its own name, it cannot make any further claims against you. It can sell the house, but if the sale does not produce enough money to pay off the mortgage, you do not have to pay the difference.

Lenders do not usually ask the court for an order absolute. Instead, they will sue you when they start to foreclose and ask the court for an order to sell your house to pay off the loan. If the money from selling your home doesn’t completely pay off the mortgage loan, the lender can attempt to collect the difference from you.

What if you have a second mortgage or other charges registered against your house?

Any mortgages or charges registered before the lender’s mortgage continue and are still valid. However, any that were registered after the lender’s mortgage are cancelled and the holders of those charges lose their security. For example, if you have two mortgages on your house, and the first lender forecloses, the second lender will have to pay off the first lender or lose its security. Then the second lender would have to try to get you to pay its loss.

Summary

A mortgage is a contract to repay a loan, secured with a charge on land. It’s registered against your property in the Land Title Office. If you fail to pay the mortgage, for example, by falling behind in your mortgage payments, the lender may start to foreclose. Then if you can’t pay the mortgage loan in full, either by selling your house or in some other way, the lender can take your property or sell it to pay off the loan.

If you receive a foreclosure petition, get legal advice right away. It doesn’t cost much to have a first meeting with a lawyer. As well, you should see a lawyer if anyone asks you or your spouse to sign any new documents, because your spouse may not be liable under the original mortgage documents.

More information

Check script 408, called “Mortgages and Financing a House Purchase”.

[updated October 2017]

The above was last reviewed for accuracy by Anna Kurt and Nathan Ganapathi, and edited by John Blois.

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