Last Updated on
A mortgage brings certain requirements with it for the borrower. You have to make your payments on time, maintain property insurance and pay the property taxes. If you do not fulfill all three of these obligations, you go into a legal position called “default.”
Eventually, “default” can lead to foreclosure, which craters your credit score and makes it likely that you would have to wait a decade to qualify for another mortgage. If you hit a situation in which you will not be able to satisfy all three obligations, one path to escape involves offering the lender a Quit Claim.
A quit claim is a contract between the borrower and the lender releasing the other from certain obligations. The lender agrees to cancel the amount due; the borrower agrees to surrender the property to the lender. Another option, of course, involves selling the property if it has a greater value than the balance due on the mortgage.
Both of these are satisfactory alternatives to going through foreclosure. If foreclosure goes the distance, you can lose the place where you live, see your credit score crash and spend months – if not years – of unneeded stress.
Foreclosure proceedings are costly for both the borrower and the lender, and they also take a great deal of time. Quit claims move more quickly and take less time. A complete foreclosure process can last a year, if not longer, and it involves fees such as appraisal, service costs and marketing that a quit claim does not require.
If you don’t have any equity in the property, the lender won’t take a Quit Claim offer. Some borrowers have other interests against the property, such as additional mortgages and liens. If the lender agrees to take the property, all those obligations transfer as well, which means that the lender would lose money – and have the hassle to deal with. For those reasons, a Quit Claim would be less likely to succeed.
For this reason, you should take care of any other interests on the property before going to the lender with a Quit Claim proposal. Within your provincial registry, you can find out what liens have been registered against the dwelling.
A Quit Claim can also protect you from future litigation from the lender. In Canada, if you took out a conventional mortgage (meaning that the loan was for less than 75% of the home’s value), the lender cannot take the property and sue you for any outstanding balance. However, a mortgage insured by CHMC, Genworth or Canada Guaranty does not carry that protection. So if your property has a mortgage that was insured, you would want to talk to an attorney before submitting a Quit Claim proposal, because you could give up the home and still find yourself the target of a lawsuit for any balance due.
Should the lender agree to a Quit Claim proposal, you would sign a title transfer to the lender, and you and the lender would both sign the Quit Claim agreement, which involves the agreements detailed above. You would want to make sure that the Quit Claim states unequivocally that the debt is no longer valid. The Quit Claim agreement should also have a list of the property that you can take with you when you move out, such as appliances that you purchased (and are not built-in). After signing the Quit Claim, you should be prepared to move out right away.
Quit Claim proposals can also work for properties other than primary residences. However, there are a variety of tax issues to consider before signing the agreement. Commercial property can bring GST tax issues to bear; leased residential property can involve income tax questions. You would want to talk to a tax attorney before entering into a Quit Claim agreement for those types of properties.
While a Quit Claim does not have the same sort of effect on your credit rating as foreclosure, it is possible that future creditors could look at your credit rating and understand that you went through a Quit Claim agreement, and that could affect your access to credit. However, the fact that you were willing to get out in front of an issue and work proactively could work in your favor.