Falling behind on your mortgage is stressful enough without having to worry about what could happen to your home, your credit, and your family’s financial future.
If you’re dealing with missed mortgage payments in certain states and provinces, a power of sale can have consequences that extend well beyond losing the house.
Your credit can be affected, you could lose some or all of your home equity, and, in some situations, you may still owe money after the home is sold.
That’s why it’s important to understand what you’re dealing with as early as possible.
The sooner you know what impact a power of sale could have on your family, the more opportunity you may have to protect your finances and decide what makes sense for your situation.
First, What Is a Power of Sale?
A power of sale is a process that allows a mortgage lender to sell your home when you’ve fallen behind on your mortgage, or otherwise broken the terms of your mortgage agreement.
In Ontario, a lender can begin the process after a mortgage has been in default for as little as 15 days.
Once a Notice of Sale is served, you typically have 35 days to bring the mortgage back into good standing.
That might sound like plenty of time, but when you’re trying to find money, speak with lenders, understand your options, and make decisions that affect your entire family, those weeks can go by quickly.
And, a default doesn’t necessarily mean missed mortgage payments. Unpaid property taxes, or allowing your home insurance to lapse, can also put you in breach of your mortgage terms.
The important thing is not to ignore the situation and hope it sorts itself out. These are five of the ways that a power of sale might permanently affect your finances.
1. Immediate Credit Damage
One of the first financial consequences of falling behind on your mortgage can show up on your credit report.
Missed payments can be reported to credit bureaus, and those late payments can remain on your credit report for years.
If the situation progresses into a power of sale, the impact can become more significant.
That damaged credit history can make it harder or more expensive to borrow money, refinance, get certain types of credit, or qualify for another mortgage.
For a family, that can make an already stressful situation even more difficult.
The last thing you want is to be trying to replace a vehicle, cover an unexpected expense, or plan for your children’s future at the same time that your access to credit has become more limited.
If you’ve missed a payment, don’t wait for the situation to become a legal problem before asking what your options are.
2. Loss Of Home Equity
For many families, their home is their biggest financial asset.
Over the years, you may have built equity through mortgage payments and increases in the value of your home. Losing that equity can have a major impact on your family’s financial plans.
When a home is sold through a power of sale, the money from the sale is used to pay what’s owed, along with certain costs associated with the process.
This can include the mortgage balance, interest, penalties, legal expenses and other claims against the property.
Whatever remains after those amounts are dealt with goes to the homeowner.
That means the amount of equity you’re able to walk away with can depend heavily on the sale price and the costs that have accumulated.
If you have significant equity in your home, it may be worth exploring whether you can sell the property yourself or refinance before the lender-driven sale moves forward.
Either option may give you more control over what happens next.
3. Liability for Any Shortfall
One of the biggest misconceptions about a power of sale is that selling the house automatically wipes out the mortgage debt.
Unfortunately, that’s not always the case.
If the home sells for less than the amount required to cover the mortgage and associated costs, you can potentially still be responsible for the remaining balance.
When your family has spent years paying down the mortgage, only to sell the home and discover that there’s still a debt left afterward, that can make it much harder to get back on solid financial ground.
The longer the process continues, the more costs can potentially accumulate.
It’s yet another reason it’s important to understand your position early, rather than waiting until the sale is already underway.
4. Paying Legal and Administrative Costs
The money collected due to a power of sale goes beyond the mortgage balance itself.
There can be legal expenses, appraisal costs, real estate commissions, and other costs associated with the process.
Depending on your mortgage agreement and circumstances, these costs may ultimately become your responsibility.
Trying to find a solution that will stop the power of sale can come with additional costs, as well.
For example, using a private second mortgage lender can potentially stop a power of sale, but they’ll generally charge interest of between 8-12 percent, and additional fees of 4-5 percent, plus any legal and appraisal costs.
While that may still be a better solution than losing your home in a power of sale, you should look carefully at the numbers and understand what you’re agreeing to, before taking on another loan.
5. Limited Options for Future Home Ownership
The financial effects of a power of sale don’t necessarily end when you leave the house.
Most mortgage lenders will look at your credit and borrowing history closely when you apply for another mortgage.
A history involving missed payments and mortgage enforcement can make getting approved more difficult, particularly if you’re hoping to buy another home soon.
There may also be issues with providing your down payment.
If you lose the equity you’ve built in your current home, you may have to start saving for a down payment again.
For a family likely already dealing with higher housing costs after losing their home, rebuilding those savings can take years.
That can affect your plans for where you live, what home you can afford, and how much money you have available for other family priorities.
How To Avoid a Power of Sale
The best strategy in ensuring that you don’t have to deal with a power of sale is to act early.
If you’ve missed a mortgage payment or you know you’re going to have trouble making the next one, contact your lender instead of waiting for a formal notice.
Depending on your situation, there may be options for catching up on payments or changing your repayment arrangements.
You may also want to speak with a real estate lawyer who can explain your legal rights under your province or state’s mortgage act.
When the arrears are too large to negotiate, a private second mortgage can bring the first mortgage back into good standing and stop a power of sale.
A private second mortgage can be used to bring the first mortgage back into good standing, but the costs can be significantly higher than a traditional mortgage.
If keeping the home simply isn’t realistic, selling it yourself will give you more control over your timing, and will generally net you more money than a lender-driven sale.
Recovering After a Power of Sale
If you’ve already lost your home through a power of sale, there are still steps you can take to start rebuilding.
Begin by checking your credit reports with both major credit bureaus and looking for errors. If you find incorrect information, have it corrected.
From there, focus on the basics. Make every bill payment on time, keep credit card balances manageable and avoid opening new accounts all at once.
Rebuilding your credit and finances isn’t something that happens overnight. But consistent, responsible financial habits will generally help your credit bounce back within a couple of years.
If you want to buy another house in the future, you should also focus on rebuilding your savings. Consider creating a specific down payment fund to help you move towards home ownership again.
Don’t Wait Until You’re Out of Options
A power of sale can affect much more than where your family lives. It can influence your credit, your savings, your home equity and your ability to qualify for another mortgage in the future.
That doesn’t mean you should immediately panic if you’ve missed a payment.
It does mean you should take the situation seriously and find out what options are available while you still have choices.
A power of sale can reshape a family’s finances for years, but almost every one of its consequences is smaller the earlier you act
If you’re an Ontario homeowner dealing with a potential power of sale, Jonathan Alphonso, Mortgage Broker and Managing Director at Mortgage Broker Store, helps homeowners explore options for using their home equity to address the situation. You can contact him at [email protected] or 416-499-2122.