Foreclosure: How it Works, What to Do

Foreclosure is the process that takes place when a borrower fails to make mortgage payments, and the lender repossesses, and typically sells, the property. The details of this process vary by province and according to your mortgage contract.

If you’re at risk of missing a mortgage payment or have already missed one, losing your home is not inevitable.

You may be surprised to learn that many lenders prefer to work with homeowners to recover, though the options available vary by lender and circumstances.

Foreclosure vs. power of sale

If a you miss mortgage payments, Canadian lenders follow one of two processes: foreclosure or power of sale.

These two processes are broadly similar — a series of notices, legal review and, ultimately, eviction — but there are key differences.

	Power of sale	Foreclosure
Where the process is used	Ontario, New Brunswick, Newfoundland, and Labrador and P.E.I	All other provinces
Does the process typically play out in court?	No — the mortgage document lays out most details	Yes
Speed	Generally faster	Generally slower
Cost	Cheaper than most foreclosures	Usually costlier than power of sale (due in part to legal fees)
If proceeds from home sale exceed the amount due, who is entitled to that amount?	Homeowner	Lender
What happens if a home sale doesn’t cover what the homeowner owes?	The lender can pursue the borrower for additional funds.	The lender can’t pursue the borrower for additional funds.
Change of ownership	The homeowner owns the property until it is sold.	The lender becomes the legal owner and may choose when to list the home for sale.

Order of events in a foreclosure

The lender contacts you after a missed payment. At the outset, the lender is usually just trying to discover what’s going on, says Grant Bazian, president of consumer insolvency firm MNP LTD. Missed payments can happen for many reasons, like failing to update payment information after switching banks.
After continued nonpayment (usually three months), the lender issues a notice of default. This tells you the amount of unpaid mortgage payments, plus interest, and a deadline to make the payment.
If the noncompliance continues, the lender sends legal notice requiring full payment.
Lender files a foreclosure petition in court. Other stakeholders, such as a second mortgage holder or someone with a lien on the property, are notified.
A judge issues a notice. The notice, issued about a month after the petition was filed, demands the borrower repay the full amount, plus interest, taxes and legal fees. Judges often give borrowers six months to pay.
If you don’t pay, the court orders the land title office to change ownership on the title to the lender. The lender often lists the home for sale, though they may choose not to. The homeowner must move out.
The lender retains the full amount from the sale, and the foreclosure is settled. This means that the lender can’t pursue an additional amount if the property sale doesn’t cover the amount owed. It also means that the lender keeps the excess if the property sells for more than the amount owed.

Order of events in a power of sale

Power of sale is a streamlined version of the foreclosure process.

The lender alerts the borrower to a missed payment. The lender can send the letter — often referred to as a “notice of sale under mortgage” — as soon as 15 days after a default. The borrower usually has between 30 and 40 days to pay.
If the borrower remains in default, the lender asks the court to sign off on change-of-possession. This is a swift process compared to foreclosure.
The borrower vacates the home, and the lender lists the home for sale.
If the home sale doesn’t cover the amount owed, the lender can file a legal action demanding the balance.

If you’re facing financial difficulty, here are your options:

People who are struggling with their financial situation experience a wide range of emotions, including frustration, anger and disbelief, says Bazian.

Bazian cautioned that fear of the unknown can prevent a person from learning what their options are.

“Be as open, as communicative as possible,” he says. “Reach out to your lender and be open with them, and hopefully they can give you some grace and some latitude — defer payments and work with you until you get your feet back on the ground.”

Ultimately, your lenders are “in the driver’s seat,” Bazian says. Contacting them doesn’t guarantee a solution, but the sooner you know your options, the better.

🤓 Nerdy Tip: Having mortgage default insurance doesn’t protect you from foreclosure. The foreclosure process works the same way if you miss payments. The insurance you have protects your lender.

Think beyond your mortgage

Remember that your mortgage is one piece of your larger entire financial situation.

Bazian said that amid a pile of bills, most people value their home and a car above all else. However, a catch-22 lurks: paying the mortgage at the expense of the other debt, including credit card debt, could lead to wage garnishment, which would prevent them from paying the mortgage in the first place.

Working with a financial professional such as a licensed insolvency trustee can help you weigh your options and create a plan. Depending on your situation, there may be a way to save your home. It may involve making other hard choices, like declaring bankruptcy. Bankruptcy would have a negative impact on your credit score, but so does losing a home to foreclosure.

Bankruptcy is not a guaranteed fix either — particularly if your home serves as collateral for any other loan — but the point remains: knowing your options is always better than not.

“Sometimes it’s hard,” Bazian said. “It’s very hard to get over that and to make that first phone call. But once you do, I think the vast majority of people feel better off for it. “