Power of Sale vs. Foreclosure: What's the Difference?
If you're facing difficulties with your mortgage, you've probably heard the terms "Power of Sale" and "Foreclosure." Many people use them interchangeably, but they are not the same. The legal process, who ends up owning the property, and what happens to your equity are completely different in each case.
Understanding these differences is the first step in knowing your rights and options. Here’s a simple breakdown of what each term means for you, the homeowner.
What is a Power of Sale?
A Power of Sale is the most common process used by lenders in provinces like Ontario. It's a clause written directly into your mortgage contract that gives the lender the power to sell your property if you default on the loan.
Think of it this way: The lender acts like a person you've legally allowed to sell your home on your behalf to pay back a debt.
Here’s the key takeaway:
You still own the house during the entire process, right up until the new buyer's name is on the deed.
The lender's only goal is to sell the home to recover the money they are owed (the mortgage balance, legal fees, and other costs).
What Happens to the Money?
This is the most important part of a Power of Sale. After the property is sold:
If there is a surplus (profit): Any money left over after the lender, property taxes, and any other secured creditors are paid in full goes directly to you, the original homeowner.
If there is a deficiency (shortfall): If the sale doesn't cover the full amount you owed, the lender has the right to sue you for the remaining balance.
What is a Foreclosure?
A Foreclosure is a different, more drastic legal process. In a foreclosure, the lender doesn't just get the right to sell your home—they go to court to ask a judge to transfer the ownership of the home directly to them.
If the court grants the foreclosure, the lender becomes the new owner of the property. Your name is removed from the title completely.
Here’s the key takeaway:
The lender takes your house. You lose all ownership rights.
Because the lender now owns the property, they can sell it whenever they want, for whatever price they want.
What Happens to the Money?
This is where foreclosure differs completely from a Power of Sale:
If there is a surplus (profit): The lender keeps all the profits, even if they sell the house for far more than you owed them. That equity you built up is gone.
If there is a deficiency (shortfall): Generally, the lender cannot sue you for the remaining balance. By taking ownership of the property, they have accepted it as full payment for the debt, regardless of its value.
Which Process is Used Where?
The process your lender uses depends on where you live and what's in your mortgage agreement.
In Canada: Power of Sale is the standard and most common remedy used by lenders, especially in Ontario, New Brunswick, and Newfoundland. Foreclosure is more common in provinces like British Columbia and Alberta.
In the United States: The terminology is different. The Canadian "Power of Sale" is very similar to a non-judicial foreclosure, which is common in many states. The Canadian "Foreclosure" is similar to a judicial foreclosure, where the lender must sue in court.
How Do They Affect Your Credit?
This is a crucial question, and the answer is simple: Both are severely damaging to your credit score.
Both a Power of Sale and a Foreclosure are considered major negative events by credit bureaus. Either one will cause your score to drop significantly (often by 100 points or more) and will remain on your credit report for six to seven years.
The main difference is that with a Power of Sale, if you are sued for a deficiency, that separate legal judgment will be another negative mark against you, worsening the credit damage.
If you are facing this situation, the most important thing to do is to seek legal and financial advice immediately. Understanding your rights is the only way to make an informed decision about your future. Contact us today for a confidential consultation.
Disclaimer: This article is for informational purposes only and does not constitute legal or financial advice. You should consult with a qualified professional to understand your specific situation and rights.
