When you take out a mortgage from a Bank or lender, you agree to do certain things: make your payments against the mortgage, keep the property insured, and keep the taxes paid. If you fail to do any of these things, it is said you are “in default” under the mortgage. If you find yourself in this situation where you cannot meet your obligations under the mortgage, you may want to offer a Quit Claim to the lender. Quit claims are signed agreements made between the lender and the borrower to relinquish certain claims to the other. The lender agrees to cancel the debt against the borrower and the borrower agrees to give up the property to the lender. Where you have some equity in your home and you cannot make the necessary payment, you may want to sell your home if the property is worth more than the debt owed.
You may want to consider these alternatives instead of being forced into foreclosure proceedings by the lender. Foreclosure on your property is more serious. If you do not respond appropriately, you could lose your home, your credit rating, and your peace of mind.
A Quit Claims involves less cost and time for both parties. The lender may agree to a Quit Claim because it is quicker than the time it takes to foreclose on your property. Sometimes it takes up to 1 year for the foreclosure proceedings to end. It is less expensive than an action for foreclosure as the legal fees are lower and expenses such as appraisals, advertising, and service costs are avoided.
The lender will not agree to your offer of a Quit Claim if you have no equity in your home. For example, you may have third party interests such as other mortgages, encumbrances or liens registered against the home. These financial registrations may add up to more than the value of the home. If the lender takes the home, all financial registrations made against the home will transfer with title to the lender. The lender may not agree to a Quit Claim in these circumstances.
You should discharge any registered financial interests on your home before you ask the Bank or lender to agree to a Quit Claim. To find out what encumbrances are registered against your property, a copy of the title of your home is available from any Alberta Registries outlet.
Generally a bank or lender cannot both take your property and sue you for the balance still owed. It depends upon the type of mortgage that you hold. A conventional mortgage is where the mortgage amount is less than 75% of the value of the home. If you hold a conventional mortgage, the lender cannot both take the property and sue you for the outstanding balance. This is not the case if you hold a mortgage that is insured by CHMC (Canada Mortgage and Housing Corporation or NHA (the National Housing Act). An insured mortgage by CHMC or NHA is where you paid less than 25% as a down-payment on the purchase of your home. If you hold an insured mortgage by CHMC or NHA, the lender may both take your property and sue you for the outstanding balance. You should consult with a lawyer if your property is an insured mortgage.
If the lender accepts your offer of a Quit Claim, you sign a document called a “Transfer” of title to your lender. You and the lender both sign the “Quit Claim.” The Quit Claim states that you agree to transfer the ownership of your property to the lender and the lender agrees to release you from any debt owed. The Quit Claim should clearly state that your debt is cancelled. It should also state the items you may take with you when you leave. For example, you may want to take the appliances with you unless they are built-in appliances. Once you sign the Quit Claim, you will be required to move out of the house immediately unless you negotiate alternate arrangements with the Lender.
For property other than residential property, there are different considerations to be made before signing a Quit Claim. For leased residential property there may be Income Tax issues that require your attention. If the property is commercial property, there are GST tax considerations as well as Income Tax. You should consult with a lawyer to ensure that the signing of your Quit Claim gets you where you want to be.
You should know that signing a Quit Claim may hurt your credit rating. Future creditors will be able to tell from your credit rating that you agreed to a Quit Claim and their decision to lend you money may be affected. However, the agreement will also indicate that you were cooperative and tried to make the best of a bad situation. The signing of a Quit Claim does not seem as bad on your credit rating as would a foreclosure on your property. You may want to consult with a lawyer before you offer a Quit Claim to the lender.