What happens if you miss a mortgage payment?
When a borrower fails to pay their mortgage installments, the lender can choose between several mortgage remedies. These include power of sale, judicial sale and foreclosure. There are several more, but these three are the most commonly used, and we will be dealing with them in this article.
Power of Sale
Following a borrower’s default, a lender may choose to sell the mortgaged property to a third party. This allows the lender to recover the remaining balance on the debt. The process is simple and fast – upon default, and only requires the lender to provide the borrower with a notice (usually 35 days). Following this notice, the lender can take steps to sell the property and convey the mortgaged property to a third party. The borrower can only stop this process if they provide the entire remaining mortgage balance, essentially buying it out. The ease and expediency of a power of sale is the main reason why it is most common.
One important consideration for a lender exercising the power of sale, is that there is a legal duty to the borrower to pursue the highest possible value for the property. A power of sale is not meant as an instrument to gain profit, only to recover an outstanding mortgage balance. Therefore if the proceeds provide any surplus after the outstanding mortgage balance has been paid, the surplus goes to the borrower. Furthermore, if the property is sold under the market’s fair value, the lender is then liable to the borrower for the loss. For some lenders, this is a reason to avoid exercising the power of sale and opting for other, liability-free mortgage solutions.
Judicial Sale
This mortgage remedy is similar to power of sale in that it also allows the lender to transfer mortgaged real estate to a third party, despite any objections on the part of the borrower. The difference between this solution and power of sale is that the court will oversee the judicial sale process. This removes the obligation to sell for the best value, and the lender will not be held liable if the proceeds are only sufficient to cover the outstanding mortgage balance.
The disadvantage of this solution is that it is a slow process, requiring longer notice to be given to the borrower, as well as several court appearances. Judicial sales also incur legal fees, which make it a less popular remedy despite the protection from liability.
Action for Foreclosure
When a lender forecloses on a property they will be awarded the full legal title to the mortgaged asset. Following this, the lender, as the sole owner of the foreclosed property, will be fully entitled to all the proceeds following a sale, with no obligation to provide any surplus to the borrower. This can, however, turn be a disadvantage for the lender, if the property value is less than the mortgage. In cases where the foreclosed real estate cannot be sold for an amount that will cover the outstanding mortgage, the lender has no grounds to make any claims against the borrower for the difference (which is not the case under a power of sale or judicial sale).
These different remedies require a lender to consider the facts of every specific situation before selecting an applicable course of action.
This article is not legal advice and the content is for informational purposes only. If you are seeking a solution, contact a mortgage or real estate lawyer in your area and consult with them on a case-specific basis.
