What Is a Power of Sale Foreclosure?
If you have a power of sale provision in your mortgage contract, the lender can foreclose without going to court.
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).
What is a Power of Sale Provision?
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?
Power of Sale Foreclosure Process
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.)
States that Allow Power of Sale Foreclosures
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.
Advantages for Borrowers
For borrowers, there are several advantages to power of sale foreclosures.
- No deficiency judgment in some states. In some states, the lender is prohibited from seeking a deficiency judgment if a power of sale foreclosure process is used. (To learn more about deficiency judgments in the foreclosure context, see our Deficiency Judgments After Foreclosure area.)
- A borrower may still seek judicial review. While the power of sale foreclosure process has no court oversight, the foreclosure can be subject to judicial review if the borrowers file their own lawsuit.
Disadvantages for Borrowers
The cons to nonjudicial foreclosure include:
- Expedient process. A power of sale is generally a faster process (usually a few months) for foreclosing on a property, as compared to a judicial foreclosure. This means you will lose the property sooner than if a judicial foreclosure was conducted.
- No judicial review unless you file your own lawsuit. To get a court to hear your side of the case with a power of sale foreclosure, you will have to file your own lawsuit (including paying the filing fees) to contest the foreclosure. For more information, see our article How to Fight a Foreclosure in Court: Nonjudicial Foreclosure.
Judicial Foreclosure When a Power of Sale Clause Exists
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.