What Is The Power Of Sale In A Mortgage Note, And How Does It Affect Foreclosure Proceedings?
February 23, 2023 3-minute read
Author: Scott Steinberg
What is the power of sale clause in a mortgage note – and how does it impact foreclosure proceedings? What’s the difference between foreclosure and power of sale? And how does the power of sale process work?
These may be questions that you’re asking if you find yourself facing financial hardship. Here we’ll take a closer look at what power of sale’s meaning is, how it works and what you need to know about it in the event of foreclosure proceedings.
What Is The Power Of Sale?
The power of sale clause in a mortgage note states that the lender has the power to sell the property in the case of a homeowner’s default. In other words, it gives your lender the right to sell your home and use the proceeds to pay your outstanding balance if you fail to pay your mortgage.
In the US, about half the states are judicial foreclosure states and half are nonjudicial foreclosure states. This difference is sometimes described as mortgage states versus deed of trust states.
In nonjudicial foreclosure states, a power of sale clause means that the homeowner faces a speedier foreclosure but walks away without a deficiency judgment on their record.
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How Does The Power Of Sale Work In Nonjudicial Foreclosures?
If you’re unable to pay your mortgage, your lender may move to foreclose on the home – a legal process that may take 120 days or more to complete. Foreclosure is a common, but not preferred, process that’s meant to protect a lender in the case of a borrower’s mortgage default.
Nonjudicial foreclosures occur if your mortgage has a power of sale clause, and allow your mortgage company to auction off your home after a warning and waiting period. Nonjudicial foreclosures can be a faster process than judicial foreclosures as they do not involve having to go to court.
Which States Allow Nonjudicial Foreclosures?
Nonjudicial foreclosure states allow for faster and more direct foreclosure processes if home loans contain a power of sale clause. Participating states currently include:
- New Hampshire
- North Carolina
- Rhode Island
- South Dakota
- West Virginia
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Power Of Sale Vs. Judicial Foreclosure: What’s The Difference?
A power of sale clause gives your lender the right to sell your home if you don’t pay and wind up defaulting on your mortgage. Judicial foreclosure is the legal process in judicial foreclosure states that your lender will follow if they need to foreclose on the home.
Deed Of Trust Vs. Mortgage
A deed of trust is a legal agreement used in some states as a stand-in instead of a mortgage and is made at the time a property is closed upon. It is an agreement between a home buyer and a lender and effectively serves as the security for the loan. A nonjudicial foreclosure will typically occur if your promissory note is tied to a deed of trust.
Judicial Vs. Nonjudicial Foreclosure
A judicial foreclosure requires your lender to get a court involved in the foreclosure process. A nonjudicial foreclosure can be pursued without legal proceedings. Which form of foreclosure that your lender can pursue varies by state. In a judicial foreclosure, your lender will file a lawsuit with the judicial system if your mortgage note does not contain a power of sale clause.
Are There Rules And Regulations That Govern Nonjudicial Foreclosure?
Certainly – the short answer is that states’ laws contain a variety of provisions designed to protect homeowners.
Right Of Redemption
The right of redemption allows you to reclaim a home that is being foreclosed upon before your lender offers it up at auction. To reclaim the home and regain possession of your property, you’ll need to repay your debts and any additional fees or interest payments that have accrued.
Homeowners who believe that their property was wrongfully taken from them can file a lawsuit pursuant to the laws of the state where the property is located if they wish to challenge the taking.
Is Power Of Sale Beneficial For The Homeowner Facing Foreclosure?
Homeowners defaulting on their monthly loan payments in nonjudicial foreclosure states face the prospect of their home being foreclose on and sold quicker than those in judicial foreclosure states.
At the same time, they don’t face the prospect of having a delinquency judgment entered on their record.
Is Power Of Sale Beneficial For Lenders?
In many senses, yes, as it helps them benefit in the form of an expedited foreclosure process. This expedited process helps mortgage loan issuers to save on costs that might be incurred as part of an extended foreclosure process.
The Bottom Line: Power Of Sale Clauses Speed Up The Foreclosure Process
People who live in nonjudicial foreclosure states will not have the benefit of staying in their homes during lengthy foreclosure proceedings, but they also won’t have a judgement on their record.
A power of sale clause effectively expedites the auctioning off of a home in the event that a borrower defaults on their loan. That said, don’t forget: You still can still opt to pursue a number of different options if you’re in preforeclosure.
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