How to deal with foreclosure before it becomes a reality

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Thinking that you might need to file bankruptcy can lead to many sleepless nights, but even more stressful is the thought of losing your home if you can’t keep up with your mortgage payments.

At a time of high home equity line of credit (HELOC) payments and increased mortgage payments due to higher interest rates, I’m hearing the word “foreclosure” more often than I have for quite some time. If you’re worried about the possibility of foreclosure, the best thing you can do is arm yourself with information so that you can either avoid it altogether or navigate it as successfully as possible.

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If you find yourself in a situation where you need to file for bankruptcy, that doesn’t automatically mean that you’ll lose your home or face foreclosure. The bankruptcy process takes your home equity and mortgage payments into account, and your home may need to be sold to obtain your discharge, but the bankruptcy process itself usually only deals with your unsecured debts.

A mortgage is a loan secured by a property, meaning that if you fall behind on payments for your first mortgage, HELOC or any type of second mortgage, the lender can take steps to recover what is owed, potentially forcing the sale of your home.

If your home is worth more than what you owe, including property taxes and legal fees, you might have enough equity to buy another home. However, if your home sells for less than what you owe, you could be sued for the difference.

To manage the foreclosure process and stay in control of your situation as long as possible, maintain active communication with your lender and/or lawyer. This involves responding to notices, attending hearings if necessary and getting your affairs in order to either qualify for new financing or to be ready to move when the time comes.

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Before foreclosure proceedings begin, there are steps you can take to avoid losing your home to foreclosure. Your mortgage lender will contact you once you miss two payments. How much time lapses will depend on your payment schedule, but the lender will request that you catch up on the missed payments immediately. If you are unable to do so and miss a third payment, they could start the foreclosure process.

Don’t avoid communicating with your lender if you can’t make your payments. They are the best ones to advise you about payment-deferral options, hardship programs through your mortgage insurer (for example, Canada Mortgage and Housing Corp.), refinancing or what else you might be able to do.

The best time to explore debt-relief options is before you fall behind on your mortgage payments. But if you do fall behind, there are still steps you can take to stay in control. For example, your lender can inform you of the costs to pay off your mortgage or transfer it to another property, which is crucial if you’re considering selling your home.

If you have equity in your home, be aware that once the foreclosure process begins, legal fees will be added to what you owe, potentially reducing or eliminating your equity if the lender sells your home. To avoid this, contact several real estate agents to determine your home’s market value. Calculate what you would net from the sale to see if it would provide a fresh start or if it would lead to another unaffordable housing situation.

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If you believe that you’ll still be in an unaffordable housing situation regardless of the outcome, review all your debt payments in relation to your income. Your mortgage payments might not be the primary source of your financial difficulties. For many, it’s the accumulation of other payments that makes it challenging to keep up with mortgage payments.

If you don’t already use a household budget to manage your expenses and spending, now is the time to start. Seek help creating a budget if you’re unsure where to begin. It’s essential to determine whether you’re spending more than you earn because your income is insufficient or because you’re spending on lifestyle “nice-to-haves.” Lifestyle spending often leads to significant debt on credit cards and HELOCs, and, before you know it, you’re spending at an unsustainable level.

Scaling back your spending can be a challenge, but losing your home is even more difficult. If your debt payments, excluding your first mortgage, consume more than about 25 per cent of your take-home pay each month, that’s considered significant. Before you think about selling your home, paying off your HELOC and moving your mortgage to a more affordable property, get help managing your other debts first.

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There are options available to help you handle your non-mortgage debts more effectively. A non-profit credit counsellor in your area can review your options with you and provide ideas to reduce your expenses and increase the funds available to your household.

Ultimately, any efforts you make to address your non-mortgage debts will make it easier to navigate or avoid the foreclosure process altogether.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 27 years.

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