Can I Give a Property Back to the Bank?
With the economic downturn and fluctuating property values, I get lots of question about the legal concept of a ‘Quitclaim.’ A Quitclaim is a legal document that states you have no further claim to something, in this case a property. You are giving up all your rights. It generally doesn’t take away any liability. This blog post will discuss Quitclaims and how they work.
The typical scenario is one where the property is worth less than the current mortgage value and has what appears to be permanent negative cash flow. The questions I get revolve around property owners who have done everything they can to make the property work for them, but it just doesn’t. They can’t keep the property so they have to do something else. Foreclosure is looming. As owners start to investigate what their options are, their research brings up the notion of ‘quitting one’s claim.’
When and How Quitclaims Are Used
Quitclaims are sometimes used when you want to give a property back to the bank. Along with other legal documentation, the bank will typically want you to sign a Quitclaim, which officially states that you don’t have any more rights to the property. Having the Quitclaim in hand then allows the bank to officially and legally take control of property and proceed with the other legal paperwork that would move the title from your name to their name.
Liability in Quitclaim and Foreclosure
If there is a Quitclaim together with the foreclosure or a foreclosure on its own, here is the next question I get: “What liability do I still have? Can the bank come after me for the difference between the mortgage and what they might sell it for (the deficiency)?”
The bank can come after you for the deficiency if you have a high ratio insured mortgage through the CMHC and a company like Genworth. Even if it’s a conventional mortgage (minimum 20% down-payment) and it’s in your personal name, they can still pursue the deficiency—unless you and the property are in Alberta.
Special Case: Conventional Mortgages in Alberta with Quitclaims or Foreclosures
Here’s another confirming question that I get: “So since we put 25% down and didn’t need any insurance (no CMHC, no Genworth, etc.), they can’t come after me or whoever is on the mortgage… Is this only an Alberta thing?” That’s right. And, yes, it is only an Alberta thing. In all other provinces the lender can come after you for the deficiency once they have sold the property. Saskatchewan might have some minor protection in this regard but, really, it is only an Alberta thing.
Whether or not a Quitclaim is used in a particular situation generally depends on the parties involved but mostly it depends on whether the bank wants or needs a Quitclaim. If you are going to formally surrender the property to the bank rather than just abandoning, then you need to speak to the bank and see how they want to go about it. They may or may not require the Quitclaim. Whatever you do, please do not simply walk away from a property without talking to your lender!
Alternatives to Quitclaim or Foreclosure
In the Canadian provinces of Alberta, and, to a lesser extent, Saskatchewan, there is an alternative to Quitclaims or Foreclosure. An Agreement for Sale allows a third party to take over a property without having to qualify for a mortgage or go through a Quitclaim. This strategy is form of seller financing that can save a person’s credit rating, whereas foreclosure would destroy it.
There’s a digital home study kit on Agreements for Sale available in the online shop, which is normally geared towards investors. But homeowners faced with Quitclaim and/or Foreclosure could also benefit from that knowledge and the template documents in order to find an investor who could save them. That would be a win/win!
Contact Barry now to get help with Quitclaims, Foreclosures, and Agreements for Sale in Alberta.
“Sign of the Times – Foreclosure” image by Jeff Turner. Used under Creative Commons Attribution Generic 2.0