What Is a Power of Sale Foreclosure?

When a lender loans money to someone to buy a home, it usually requires that the obligation be secured by a mortgage or deed of trust on the real estate that the borrower is buying. In some states, the most common form of loan contract is a deed of trust or a mortgage with 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.

How Power of Sale Foreclosures Work

With a power of sale foreclosure, the lender can foreclose without court oversight. (In a judicial foreclosure, on the other hand, the lender forecloses through the state court system.) 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, sometimes by taking one or more of the following actions: mailing, publishing, or posting the notice.

Then, a trustee (a third party that typically handles the nonjudicial process) can sell the property at a foreclosure sale. The lender must strictly follow the procedures and timeline of notifications, as well as waiting periods, prescribed by statute when completing a power of sale foreclosure.

States That Allow Power of Sale Foreclosures

The states where power of sale foreclosures are allowed and generally used are: Alabama, Alaska, Arizona, Arkansas, California, Colorado, the District of Columbia (sometimes), Georgia, Hawaii (sometimes), 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 of Power of Sale Foreclosures for Borrowers

For borrowers, power of sale foreclosures offer several advantages.

• 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.
• 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 of Power of Sale Foreclosures 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. So, you'll most likely lose the property sooner than if a judicial foreclosure happens.
• 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'll have to file your own lawsuit, including paying the filing fees, to contest the foreclosure.
• In some states, you won't get much notice about the foreclosure. Depending on what state law requires, you might get a notice of default followed by a notice of sale, a combined notice of default and sale, just a notice of sale, or in a couple of states, notice only by publication and posting.

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 court system. Lenders often choose the judicial route if the title to the property has issues, the security instrument has a flaw, or to get a deficiency judgment because, in some states, it can't obtain a deficiency judgment unless it conducts a judicial foreclosure.

Getting Help

If you're facing a foreclosure and want to find out whether the process will likely be nonjudicial or judicial, as well as to learn specifics about foreclosure procedures in your state and get advice about ways to avoid a foreclosure, consider talking to a foreclosure attorney. It's also a good idea to talk to a HUD-approved housing counselor.