Real Estate

How to Buy a Foreclosed Home in Canada

How to Buy a Foreclosed Home in Canada
Written by
  • Tvine Donabedian
| 21 April 2023
Reviewed, 24 April 2023
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    Many homeowners find themselves in situations where it’s becoming more difficult to afford basic necessities. With rising interest rates, falling home prices and rising inflation, their budgets are being stretched while wages fail to keep up. The recent Bank of Canada (BoC) rate hikes have some homeowners feeling the pinch with their mortgage payments which could eventually lead to having to go through foreclosure. 

    Homes are foreclosed when the homeowner defaults on their mortgage payments – meaning they have stopped making payments under the promised mortgage terms. If enough time passes without payments, the lender can recall the mortgage and sell the home to pay off the debt. 

    Key Takeaways

    • Though rare in Canada, homes are foreclosed when the homeowner repeatedly defaults on their mortgage payments.
    • Depending on the province where the property is located, homes will be sold in either a judicial sale or power of sale.
    • Foreclosed homes are typically priced cheaper than the market but can become more expensive due to bidding wars, multiple offers, and hidden costs. 

    How Can I Buy a Foreclosed Home in Canada?

    In Canada, foreclosed homes for sale are relatively rare as lenders typically don’t want to go through the process, which can be costly and time-consuming. The process to buy a foreclosed home depends on the province you are purchasing in, though it usually mirrors the steps you would take when purchasing a regular home on the market, except for a few more legal processes depending on the type of sale. 

    What Are the Sales Processes for Foreclosures?

    Foreclosed properties may not be common in Canada, but once it’s determined that the homeowner is still unable to meet their payment based on mortgage terms – the home is repossessed for sale as a last resort. Repossession is final, with homeowners typically given 30 days to move out of the property after receiving the court order. Repossessed houses for sale are typically sold in one of two ways:

    Judicial Sale

    A judicial sale, most common in Nova Scotia, Quebec, Alberta, Saskatchewan, and British Columbia, happens when the lender needs to submit a petition to the judicial court for permission to sell the property. This process can be time-consuming due to the court case and more costly since legal fees will be required. 

    With judicial sales, lenders in these provinces can begin foreclosure immediately after the first missed mortgage payment – though this is unlikely. Once legal proceedings begin, the borrower will be served a “Statement of Claim for Debt and Repossession” and given 20 days to respond with a “Statement of Defense.” If the borrower doesn’t respond or loses the case, the court may grant the lender permission to sell the home. 

    The end-to-end process can take several months to a year to be finalized. Once the process is over, the lender will then be able to sell the property either through a traditional real estate sale or through an auction. A portion of the proceeds from the property sale will be used to cover the legal costs incurred during the judicial sale process. 

    Power of Sale

    A power of sale, most common in Ontario, Newfoundland, New Brunswick, and Prince Edward Island, occurs when the lender has the right to sell the property while avoiding judicial court proceedings through a clause in the mortgage contract. 

    With the power of sale, lenders reserve the right to repossess the property, typically after four missed mortgage payments. Borrowers are granted a 35-day redemption period to catch up on the defaulted payments and any late penalties, outstanding taxes, and other fees. Failure to make these payments will result in the borrower receiving a 30-day eviction notice. 

    Once the process is over, the lender will then be able to sell the property either through a traditional real estate sale or through an auction. 

    Why Foreclosed Homes are Cheaper

    Foreclosed properties are generally sold cheaper than other properties as lenders attempt to recover as much of the original loan amount as possible. There is an urgency to sell off the property and recoup costs. These properties are also generally sold in as-is condition, meaning they may require some or a lot of work to restore the property to a liveable condition. 

    What Are the Risks of Buying Foreclosed Homes in Canada?

    There are some risks involved when purchasing a foreclosed home that you will need to consider when deciding if this type of purchase is right for you. Consider problems that arise from buying an as-is property, additional costs and fees, and the competition in the market. 

    As-Is Property Problems

    When purchasing foreclosed properties, you essentially agree to buy the property in an as-is state. If the property is in poor condition or has the previous owner’s possessions left behind, you will be on the hook to remove items and repair the property. This could add up quickly in unexpected expenses in addition to the purchase price. 

    Some issues you could face on an as-is property purchase include mould, structural damage, damage to drywall, electrical issues, trouble obtaining insurance, etc. There are no warranties on a foreclosed property, and it may not be possible to view the property or even complete a home inspection.  

    Additional Costs & Fees (Land Transfer Tax)

    Land Transfer Tax (LTT) is one expense you must budget and account for when purchasing a foreclosed property. LTT rates are calculated based on the property’s purchase price and vary by province, so a general rule of thumb is to budget between 1-2% of the property value to cover these taxes. In some parts of Canada, say if you’re looking at foreclosures in Toronto, you must also budget and pay an additional municipal land transfer tax

    High Competition

    As with discounts or bargains, people will always want to score deals. This can quickly lead to bidding wars since foreclosed homes rarely come on the market. Many investors and flippers will look for foreclosed homes to make a quick dollar, driving higher demand (and prices). This can lead to high-stress situations with multiple offers and the potential for bidding wars.

    Tips To Prepare For The Foreclosed Home Application Process

    If you are preparing to purchase a foreclosed home, ensure that you secure financing and work out a budget – making sure you have enough saved for all additional expenses that may come up. Connecting with a lender to obtain a pre-approval can help you better understand what you can afford. Additionally, connecting with a local realtor can help you find more information about your region’s foreclosure market.  

    Create a Budget

    There are many costs involved when purchasing a property, which is the same as when purchasing one that has been repossessed. You will want to create and assess your budget before jumping into the process to see what you can reasonably afford, as well as set aside some additional funds for any unexpected extra costs that may come with purchasing an as-is foreclosed home.

    Some things to consider when budgeting for these costs include changing the locks, purchasing new appliances, land transfer taxes, permits and repairs, and setting up utilities. 

    Prepare Financials & Documents Required

    As with obtaining any mortgage – foreclosed homes will go through a similar mortgage approval process. To ensure you qualify, you should review and look for ways to improve your credit score, boosting your chances of qualifying. You will want to pay down or off any debts you have, as well as save and prepare to make funds available for your downpayment and any other additional closing costs. 

    In addition to having funds readily available, you will also want to begin preparing the income documents you will need, which may include the following:

    • T4s
    • Recent pay stubs
    • Letters of employment
    • Notice of Assessment (NOA)
    • Any other proof of income (from freelancing, rental income, investments, etc.)

    Hire a Realtor

    Purchasing foreclosure houses can be more complex than other real estate purchases. It’s important to do your due diligence and find a realtor that can help guide you through the process. Connecting with a real estate agent will also help you search for foreclosure listings if you aren’t sure where to begin. A great realtor will be able to help answer any questions you may have and give you a better understanding of the complexities involved and whether purchasing a foreclosed home is right for you. 

    Frequently Asked Questions

    What kind of mortgage can I get for a foreclosed home?

    Obtaining a mortgage for a foreclosed home follows the same standard procedure as getting a mortgage for any other type of home purchase. 

    What kind of inspections should I get when buying a foreclosed home in Canada?

    When purchasing a foreclosed home, it’s important to get a full home inspection, if possible, to know what sort of state the home is in before making an offer so you can condition your purchase accordingly. 

    What documents do I need to provide when buying a foreclosed home?

    In addition to the documents typically required for purchase – you may also need to validate any details that would otherwise be in an MLS listing. For private sales, additional documents may be required to complete due diligence.

    Final Thoughts

    Buying a repossessed property can be an excellent way for buyers to save since these properties are typically sold at a discount. While we’re all attracted to a good deal – it’s essential to consider what challenges or potential issues may arise if you’re seriously considering a foreclosed home. Connecting with a realtor can help you better understand the process and find foreclosed houses for sale – making the process easier to find the perfect home to make your own.