If a borrower defaults on their home payments, the mortgage lender must normally go through the state court system and get a court order to do a foreclosure. Once that has been done, the lender can sell the property to recoup the unpaid loan balance. But in some cases, the lender includes a power of sale clause in the deed of trust, which gives them the ability to do a foreclosure sale without going through the court system. Power of sale clauses ultimately protect the mortgage company and lead to a much faster foreclosure process. This article will tell you what you need to know about how a power of sale foreclosure works and how to find out if they apply to you.
Written by Mark P. Cussen, CFP® , CMFC.
Updated September 27, 2021
If a borrower defaults on their home payments, the mortgage lender must normally go through the state court system and get a court order to do a foreclosure. Once that has been done, the lender can sell the property to recoup the unpaid loan balance. But in some cases, the lender includes a power of sale clause in the deed of trust, which gives them the ability to do a foreclosure sale without going through the court system. Power of sale clauses ultimately protect the mortgage company and lead to a much faster foreclosure process.
How a Power of Sale Foreclosure Works
Power of sale foreclosures are also called nonjudicial foreclosures because the lenders don’t have to file a lawsuit in court to foreclose on a borrower’s property and sell it. Judicial foreclosures do require lenders to go through the court system to complete the foreclosure process. Judicial foreclosures are more expensive and take more time to process than nonjudicial foreclosures. A power of sale clause allows for quick and direct action by staying out of the court system.
If a lender wants to include a power of sale clause, it must do so using a deed of trust instead of a standard mortgage. Deeds of trust are only used in some states, so the mortgage lender must adhere to state laws when it does this. The deed of trust puts the real estate into a trust managed by a third-party entity, such as an escrow company.
The power of sale foreclosure process is governed by state laws. Each state has its own set of rules outlining how foreclosure proceedings must go. Lenders must strictly adhere to these laws, which specify the foreclosure timeline including required waiting periods. The law will also outline when the lender must issue a notice of default to the homeowner. The borrower will receive this notice, as well as a notice of sale prior to the actual foreclosure. This way they have time to move out and find a new place to live.
Lender Gives Notice of Default or Sale
Once a borrower has missed a certain number of payments on their mortgage and repayment is no longer an option, the lender is allowed to send a notice of default and/or a notice of sale. These state the lender’s intention to foreclose on the home via public auction, where the home will be sold to the highest bidder. The notices may be mailed, published in a local paper, or posted on the property itself. Once the notices have been delivered and the date of the auction arrives, the foreclosure trustee takes over and administers the actual sale of the foreclosed property. The lender doesn’t control the property during this process, so it may buy the property if it so chooses.
Power of Sale Foreclosure Timeline
Power of sale foreclosures happen considerably quicker than foreclosures that go through the court system. A power of sale foreclosure can be accomplished in just a few months or even less in some cases, depending on state regulations. Judicial foreclosures can take anywhere from several months to a few years, depending on the circumstances of the sale and the homeowner.
All states have a right of redemption period, where the current homeowner has the opportunity to pay off the entire mortgage plus applicable fees and costs to get the home back. About half of all states also provide a statutory right of redemption, where the homeowner can buy the property from the entity that bought the house at the foreclosure auction for the bid price plus all applicable costs and fees.
States That Allow Power of Sale Foreclosures
There are 32 states that allow power of sale foreclosures: Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia (sometimes), Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico (sometimes), North Carolina, Oklahoma (unless homeowner requests judicial foreclosure), Oregon, Rhode Island, South Dakota (unless homeowner requests judicial foreclosure), Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming.
Pros and Cons of Nonjudicial Foreclosure for Homeowners
Power of sale foreclosures tend to favor the lender, but there are both advantages and disadvantages for both homeowners and lenders.
Pros of Nonjudicial Foreclosures
Although power of sale clause foreclosures don’t go through the court system, borrowers can request a judicial review. Issues with the title or deed or questions about whether the lender followed the proper procedure may have to be resolved in court. Also, some states don’t allow lenders to pursue a deficiency judgment against borrowers in power of sale foreclosures. This means if there’s an outstanding balance after the home is sold, the borrower won’t be on the hook to pay it.
Cons of Nonjudicial Foreclosures
Borrowers who default on their mortgage loans can lose their homes much more quickly with a power of sale foreclosure. They can face eviction within just a few months or even sooner in some cases. In the event of default, power of sale clauses can move very fast.
Also, power of sale foreclosures aren’t reviewed by the courts. So if the borrower thinks that the mortgage holder is acting improperly, then the borrower’s only recourse is to file a suit in court at their own expense. Attorney fees and other court costs can be expensive, and the process can be time-consuming. Plus, there’s no guarantee that the borrower will win the case.
A power of sale clause in a deed of trust allows lenders to foreclose on a property and sell it if the borrower defaults on their monthly mortgage payments. This allows the lender to recoup the outstanding loan balance on the home. The courts are not required to be involved in this process, so the timeline for power of sale foreclosures is much shorter than for judicial foreclosures.
Power of sale clauses are allowed in 32 states in the U.S. All 50 states allow for an equitable right of redemption for borrowers, while only some states allow for a statutory right of redemption. Consult with a foreclosure attorney for more information on power of sale clauses and whether they can apply to you.