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.
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.
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.
For borrowers, power of sale foreclosures offer several advantages.
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 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.
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.