If a homeowner fails to make their mortgage payments, the most common solution for the lender is Power of Sale. If you have a client who is in this situation – or if you are selling a Power of Sale home for a lender, it is important to understand the various aspects of Power of Sale and how you can best serve your client.
What is Power of Sale?
In this process, the lender notifies the homeowner that their mortgage is in default and outlines what must be paid and by when. If the homeowner fails in this regard, the lender will have the right to evict the owner and place the home on the market.
Steps involved in Power of Sale
In order for a Power of Sale to be legal, there is a strict process that must be followed. The steps in a Power of Sale are:
• Contact the homeowner – the lender must notify the homeowner that they are in default and give them a chance to pay what they owe.
• Deliver a Notice of Sale – If the homeowner still does not pay after being contacted, the lender must then deliver a Notice of Sale by registered mail. This must be done no sooner than 15 days after the default. The lender must then wait 35 or 40 days (depending on who lives on the property) before any further action may be taken.
• Redemption period – The 35 to 40 days is known as the redemption period. During this time, the homeowner has the opportunity to bring their mortgage back into good standing by paying what they owe plus any legal fees. If they are unable to bring their mortgage back into good standing during this time, the lender may issue a Statement of Claim in order to collect what they are owed and to take possession of the property.
• Application to Take Possession of the Property – If the homeowner remains in default after the redemption period, the lender may obtain a default judgement and apply for the issuance of a Writ of Possession. The Writ of Possession gives authority to the Sheriff to evict the borrowers on a scheduled date.
• Selling the property – Once the occupants have been removed from the property, the lender may sell the property. It must be sold at a fair market value and not for a deep discount. When the property has been sold proceeds go to the following parties in this order:
• To the lender to cover legal and real estate fees, etc.
• To the lender to cover what they are owed plus any interest.
• To subsequent lenders, creditors, etc (if there was any money left over after the lender received their money).
• To the former homeowner (if there were any funds left over after the above were paid).
Things to know as a realtor before listing a house under Power of Sale
If you are listing a Power of Sale home, there are several unique factors that you must take into consideration and know about.
Many buyers think that they are going to get a great deal when they purchase a Power of Sale home, but this is not necessarily the case. While it is true, that the lender is unlikely interested in a bidding war – since they may already be losing money on the property – they are still legally required to sell at fair market value.
Additionally, the lender may not be willing to guarantee that property taxes or utility bills have been paid – so the buyer could be on the hook for those as well. It is important that the buyer understands these risks and is prepared to take them.
If however, the buyer doesn’t mind a quick closing and is prepared to take the risks that come with buying a Power of Sale home, they could get a decent deal.
How the redemption period works in a Power of Sale
If a homeowner is facing a Power of Sale, the timeframe known as the redemption period is a critical time. Once the lender has issued a Notice of Sale the borrower has 35 to 40 days to rectify the situation. This means that they must pay the lender what they owe plus any interest and possibly legal fees.
During the redemption period, the lender cannot take any further action. They must give the borrower an opportunity to bring their mortgage back into good standing.
Power of Sale vs. Foreclosure
Although the terms are sometimes used interchangeably, Power of Sale and Foreclosure are not the same thing, and it is important for the homeowner (and real estate agent if one is involved) to know the difference.
Power of Sale and Foreclosure are similar in that they both use many of the same legal documents including the Notice of Sale and the Writ of Possession. The Statement of Claim will clearly state whether the action being taken is a foreclosure or a Power of Sale.
The key differences in these two actions are as follows:
• In a Foreclosure, the lender takes the title of the property. In a Power of Sale, the lender sells the property but does not take the title.
• After the sale of property in a Power of Sale, the homeowner receives any excess profits after the lender and other creditors have been paid. In a Foreclosure, the homeowner gets nothing from the sale.
• The Foreclosure process can take more than a year to complete. The Power of Sale process takes about six months.
What can a homeowner do to stop a power of sale or foreclosure?
There are a variety of strategies that a homeowner can employ in order to stop a Power of Sale or Foreclosure.
Here are some of the common strategies.
• The homeowner can bring their mortgage back into good standing by paying the lender. In many cases in order to do this, they will have to get another loan. (sometimes called a Stop Power of Sale loan).
• Refinance their mortgage. If the credit of borrower hasn’t been too badly damaged from having their mortgage in arrears, they may be able to replace the problematic mortgage with a new one. Refinancing typically comes with a financial penalty but it may be worth it to the homeowner in order to keep their home.
• Sell the property before the lender takes possession. Although in this option the borrower does not get to keep their home, it offers the possibility that they will be in a better financial position than if the lender sells their home. This is certainly in the case in a Foreclosure (where they would get nothing), but it may also be the case in a Power of Sale as well, since the lender is likely most interested in selling the property as quickly as possible rather than selling it to get the best price.
• Finally, there my also be some legal remedies you can use to stop a Power of Sale (eg. When the lender does not follow the correct process).
The right solution for any individual homeowner is going to depend on a number of factors including the value of the home, how much is owed on the mortgage, and the stage of the legal process that they are currently in.
Can you stop Power of Sale even after your home has been sold firm?
Once your home has been sold, it might seem like all is lost and that the only thing that you can do is move on. But as long as closing has not taken place yet, it is still possible to redeem your home. (If you are a real estate agent selling a Power of Sale home, it is important to know this and ensure that the buyer does as well.)
So if you are a homeowner in a Power of Sale process, as long as the home has not closed, you have the opportunity to get your mortgage back into good standing and stay in your home.
Ways to redeem your home while it is under Power of Sale
As discussed, there are several things you can do in order to stop a Power of Sale, and in this section we will discuss them in regards to what stage of the legal process the homeowner is in.
Stopping a Power of Sale after Notice of Sale
The best way to stop a Power of Sale once you have received a Notice of Sale is to bring your mortgage back into good standing. Keep in mind that any legal and administrative fees incurred by the lender will be charged back to the mortgage, so you will have to pay these as well.
In order to make the necessary payments, you may have to take out a personal loan. Borrowing from you home equity can be a good way to do this. This strategy is sometimes call second mortgage to stop power of sale.
Stopping Power of Sale after Redemption Period
Even after the redemption period, there are ways that you can stop a Power of Sale. For example, you may be able to pay off your mortgage arrears in court. Say for example, you were not able to get the financing you needed during the redemption period, but you’ve got it now – going to court to pay your mortgage could help you to bring our mortgage back into good standing.
Refinancing your mortgage with a private lender could also give you the financing your need to pay off your mortgage arrears.
The best way to find a solution for your unique situation is to consult with a mortgage broker. They have access to many different lenders and mortgage strategies and they can help you find the best solution to suit your needs.
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If you are a homeowner, real estate agent or mortgage agent requiring help in dealing with a Power of Sale situation, call me to see how I can help you quickly.