This article is by Paul Murphy, our VP and financial literacy expert with 15+ years of investment and banking industry experience.
We often get asked, “I missed a mortgage payment. What happens now?” While missing a mortgage payment is serious, you do have options. Here’s some advice about what to do next.
If you don’t want to read the entire post, the core of my advice is this:
- Contact your lender immediately. They could be flexible and offer a solution (explained below).
- Be proactive if you are going to miss another payment and inform the lender ahead of time.
- Seek some professional advice as the lender, if they think you will not be able to afford the house, will begin to protect themselves.
The advice you’ll usually get about being late with your mortgage payment is “don’t be.” Unfortunately, things are never that simple, but the advice also holds merit if you are juggling different debts each month trying to decide which one to pay.
If you’ve missed a mortgage payment, there are of course cash flow issues going on and you are likely juggling and deciding which debts to repay. It’s tough, I know.
You’ve missed a mortgage payment. What should you do next?
Step one: contact your bank or lender immediately
The mortgage lender is likely already seeing more foreclosures than they anticipated and their goal should be to assist you in finding a reasonable and affordable solution.
People can be very reluctant to contact the lender as they feel they are bringing the issue to the lender’s attention before it’s necessary, and they somehow feel this might escalate the lender’s action to foreclose.
With the majority of lenders, being forced out of the home happens only when all efforts and options have been fully explored.
The lenders will usually look at a number of different situations including:
- A longer amortization period to lower monthly payments
- Switching from a variable rate to a fixed mortgage to provide a consistent payment plan you can budget for without fear of any future interest rate increase
- Refinancing or second mortgage
- There may be an option for a payment holiday or adding missed payments to the back of your current mortgage
Bear in mind that there are times when the house is obviously unaffordable and it simply doesn’t make sense to keep it and the lender will see any short-term remedy as simply delaying the inevitable.
In this case, make sure you seek your own advice on how the process can be handled as the banks will ultimately be looking at ways to protect themselves.
There is limited action the lender will take in the early days besides calling you but this can escalate quickly and you will have more options prior to default than after to save the house.
Step two: be proactive about the next missed payment
If you think you might miss another payment, make a call before you miss the payment.
Pro-actively addressing this will give you more options than trying to deal with it when you have already missed payments.
So call the mortgage holder or contact your servicing branch. The branch may not always be able to offer solutions but they can refer you to an alternative department within the bank.
How long does it take for a bank to take your house if you keep missing mortgage payments?
Whenever a borrower fails to meet his or her mortgage commitments as per the original mortgage lending contract, the lender will consider the borrower to be in default.
The lender then has the right to start taking certain actions as defined in Law to sell the property.
Doing nothing is certainly the easiest way to respond to the banks threats and is too often the option people take, as it is more overwhelming for them to address the situation and face reality.
You can live in your home without making mortgage payments for a period of time while the lender follows the process to obtain the right to sell the property which could be anywhere from 2-6 months.
But it also means that:
- You don’t get any say in the proceedings, they will move forward and your consent is not required
- You may get little or no notice if the house is sold
- You may have to leave your home much earlier than you hoped
Let’s look at the worst-case scenario: Foreclosure or power of sale, depending on what province you live in. Both of these options give the lender the right to sell the property to recover the outstanding balance of the mortgage.
How home foreclosure works
In Ontario, it is usually a process called ‘Power of Sale’ and other provinces follow the ‘Foreclosure’ process.
Both are a legal process designed to provide the lender an option to sell the property in the event the borrower defaults on the agreement.
Power of Sale
During this process, the ownership of the property only actually changes hands after the sale is complete.
Any additional funds – after costs are covered and the mortgage is paid out – go back to you (original owner of the property) and you are responsible in the event there is a shortfall.
The property will be sold quickly but not a ‘fire sale’ as the lender has a duty to obtain a fair price for the property based on the circumstances of the sale, and the homeowner has a right to review the transaction.
In the event the lender is not paid in full, and if the lender is insured, the lender will make a claim to the insurer and they will pay the lender the shortfall and the insurer will pursue the original homeowner for the shortfall.
If the lender is not insured then they will pursue the homeowner for the shortfall directly.
The first step of the power sale is for the Lender to issue a Notice of Sale.
This can happen any time after the mortgage is 15 days in default but will rarely happen if you are in discussions with the lender to try and find a workable solution to keep the home.
The notice of sale will contain a redemption date and the Borrower has this period of time to bring the mortgage back in good standing, this will include all arrears and legal costs. If this is not done, the lender applies to the court so the property can be sold.
Foreclosure is also a legal proceeding; in this case, the lender applies to the court for an order to take possession of the property and sell it.
There are strict rules in a foreclosure that the lender must follow. The first process is they must issue a demand for payment of the mortgage in full and provide the borrower a set period to make the payment.
No further action can be taken by the lender during this period, but it is the first part of the process of the lender taking possession of the house and the significance of this action is not to be underestimated.
The next step is to start the court proceedings. The lenders will have their lawyers file a Petition in the courts. The Petition contains, amongst other things, confirmation of the amount you owe.
This will now include daily interest and legal costs and it will set the length of time you have to get the mortgage back in good standing or pay the mortgage in full. This is basically the time that you can remain in the house.
The Petition will also request a judgment against you and anyone else that has guaranteed the mortgage, as well as request the control of the sale of the property.
Once you receive the Petition you can respond to it and try to fight it if the information is inaccurate or try to delay the foreclosure, or simply accept it and work with the lender to make the process as easy as possible for both parties.
In order to respond to the Petition, you should first read and fully understand what it contains and ensure it is accurate. If you feel like you have a valid defence or you simply want to delay the process to give you extra time in the home, either way you should get your own legal advice.
Pay down debt or keep your home?
The general rule is if you want to keep your home, your mortgage should take priority over paying the unsecured debts. You have many more options to deal with unsecured debt vs. secured debt.
Before you stop paying the unsecured debt to make the mortgage affordable, you should seek professional advice and ensure you have a plan in place to deal with the unsecured debt.
From our experience, finding a solution to deal with the other debts i.e. credit cards, lines of credit, consolidation loans, etc. is all the help people need to obtain a positive cash flow each month and make the mortgage easily affordable.
One of the key things to look at if you are about to miss a mortgage payment is whether you can afford the house you live in, or whether you’re over-extended.
You need to take an honest and realistic approach to this and try and remove the emotion.
You need to complete an accurate budget and show fixed costs and variable costs for the month and then decide even if you can get through this month and find the funds to pay the mortgage, is it going to be a constant monthly struggle and will you be constantly relying on other forms of credit to subsidize other household costs?
If you decide your house is unaffordable then there are options.
Obviously, if there is equity in the house, selling the house is the best option.
If you are in a negative equity situation then this needs to be carefully planned and professional advice is required.
Other resources to help you:
A stern word from our lawyers . . .
The material contained in this article is intended to provide only general information and comment to our clients and the public. Although we make our best efforts to ensure that the information in our articles is accurate and timely, we cannot, and do not, guarantee that the information is either. Do not, under any circumstances, rely on information found in our articles as legal advice as legal matters are often complicated and fact-specific.
For assistance with your specific legal problem or enquiry please contact a lawyer registered to practice in your jurisdiction. We will not under any circumstances be liable to you or to any other person for any loss or damage arising from or relating to the use of the information contained in this article by you or any other person.
© 2014 – 4 Pillars Consulting Group Inc. All rights reserved. This article may not be reproduced in any form for commercial purposes without our express written consent.