In some states, the deed of trust or mortgage has a power of sale provision. A "power of sale provision" is a clause in the loan contract. In this clause, the borrower pre-authorizes the property's sale through a nonjudicial foreclosure process after a default. The sale proceeds pay off all or part of the loan balance.
With a power of sale foreclosure, also called a "nonjudicial" 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:
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, set out in the state statutes 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, nonjudicial foreclosures have several advantages.
In some states, the lender is prohibited from seeking a deficiency judgment if the lender uses a power of sale foreclosure process.
While a power of sale foreclosure process has no court oversight (or very little), you can still get a court to hear your case if you file your own lawsuit.
The cons to nonjudicial foreclosure include the following.
A power of sale is generally a faster process, usually taking just a few months, when compared to a judicial foreclosure. So, you'll most likely lose your home sooner than if a judicial foreclosure happens.
Again, 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 to contest 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 notice by publication and posting only.
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 speak to a HUD-approved housing counselor.