What is the power of sale in a mortgage note, and how does it affect foreclosure proceedings?

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 means in real estate, 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, in states where it’s permitted, power of sale 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. A power of sale clause means that the homeowner faces a speedier foreclosure but walks away without a deficiency judgment on their record. Having a deficiency judgment waived protects the homeowner from further litigation if the home sells for less than what they owe.

Judicial vs. nonjudicial foreclosure

A judicial foreclosure requires your lender to go through the courts to proceed with foreclosure. A nonjudicial foreclosure means the lender can pursue foreclosure without going through the courts. Which form of foreclosure that your lender can pursue varies by state. In a judicial foreclosure, your lender must file a lawsuit with the judicial system if your mortgage note doesn’t contain a power of sale clause.

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 allows 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 don’t 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:

• Alabama
• Alaska
• Arizona
• California
• Colorado
• Georgia
• Hawaii
• Idaho
• Maine
• Maryland
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Montana
• Nevada
• New Hampshire
• North Carolina
• Oregon
• Rhode Island
• South Dakota
• Tennessee
• Texas
• Utah
• Washington
• West Virginia
• Wyoming

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 sold. 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.

Are there rules and regulations that govern nonjudicial foreclosure?

For homeowners in nonjudicial foreclosure, 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.

Legal action

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 mortgage payments in nonjudicial foreclosure states face the prospect of their home being foreclosed on and sold quicker than those in judicial foreclosure states.

At the same time, homeowners with a power of sale clause don’t face the prospect of having a delinquency judgment entered on their record.

Is power of sale beneficial for lenders?

In many senses, power of sale is beneficial for lenders as it helps them pursue 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 won’t benefit from staying in their homes during lengthy foreclosure proceedings, but they also won’t have a judgment on their record. This is due to the power of sale clause.

A power of sale clause effectively expedites the auctioning of a home in the event that a borrower defaults on their loan. That said, don’t forget: You can still opt to pursue several different options if you’re in preforeclosure.

If your lender has begun foreclosure proceedings, learn about the different options that may help keep you in your home.