When a lender loans money, it often requires that the obligation be secured by a mortgage or deed of trust on real estate owned by the borrowers. In some states, the most common form of mortgage is the deed of trust or mortgage with a power of sale provision. Read on to learn more about power of sale provisions and power of sale foreclosures (also called nonjudicial foreclosures).
A power of sale provision is a clause in the deed of trust or mortgage in which the borrower pre-authorizes the sale of property by way of a nonjudicial foreclosure to pay off the balance of the loan in the event of a default. With a power of sale foreclosure, the lender can foreclose without court oversight. (In judicial states, the lender must foreclose through the state court system.)
To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?
State statutes establish the procedures for power of sale foreclosures. Each state has its own requirements.
Generally speaking, after the borrower defaults (by failing to make payments), the lender provides limited notice of the foreclosure, usually by mailing, publishing, and/or posting the notice. Then a trustee is allowed to sell the property at a foreclosure sale. The lender must strictly follow the procedures and timeline of notifications and waiting periods prescribed by statute when completing a power of sale foreclosure.
(For more information about how the power of sale nonjudicial foreclosure process works, see How Foreclosure Works.)
The states that allow foreclosure by the power of sale are:
Alabama, Alaska, Arizona, Arkansas, California, Colorado, the District of Columbia, Georgia, Hawaii, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia, and Wyoming.
For borrowers, there are several advantages to power of sale foreclosures.
The cons to nonjudicial foreclosure include:
Sometimes, even if the deed of trust or mortgage contains a power of sale provision, the lender may choose to pursue foreclosure through the courts. Lenders often choose the judicial route if there are title issues, a flaw in the security instrument, or to pursue a deficiency judgment since, in some states, it cannot obtain a deficiency judgment unless a judicial foreclosure is pursued.