What Is a Power of Sale?
A power of sale is a clause written into a mortgage note authorizing the mortgagee to sell the property in the event of default in order to repay the mortgage debt. Power of sale is permitted in many states as part of a lender's rights to seek a foreclosure.
- Power of sale is a mortgage clause that permits the lender to foreclose on and sell a property in default in order to recover the remainder of the loan.
- This clause, which is legal in many U.S. states, allows for a foreclosure process that circumvents the courts for speedier outcomes.
- If a mortgage also contains a right of redemption, the borrower in default can recover their property by paying back all interest and principal due as well as all foreclosure costs, or the foreclosure sale price plus fees.
Understanding a Power of Sale
The power of sale clause invokes the right of foreclosure, which describes a lender's ability to take possession of a property through a legal process called foreclosure. Lenders may use their right of foreclosure when a homeowner defaults on their mortgage payments. The mortgage’s terms will outline the conditions under which the lender has the right to foreclose. State and national laws also regulate the right of foreclosure.
Mortgages that include a power of sale clause can put the borrower in a position of facing a speedy foreclosure process if they lapse into default. The borrower might be able to compel a judicial review of a foreclosure that was allowed under power of sale. They typically would need to file litigation to bring the case to court.
Power of sale foreclosures are also known as nonjudicial foreclosures.
Power of Sale vs. Judicial Foreclosure
More than half of all states allow power of sale clauses, which allow for foreclosures without judicial review. The lender must follow specific guidelines and procedures to take action. After the borrower defaults on the mortgage, the lender typically must give notice of the pending foreclosure. This could be in the form of a letter to the borrower as well as public notice that the property will be up for sale. The lender might need to use a third party to conduct the foreclosure sale. A borrower may receive little warning after a default that a power of sale clause has been implemented and the property will be sold.
A lender who uses a power of sale clause to foreclose on a property may be prevented from seeking a deficiency judgment against the borrower. When a property is sold through a foreclosure auction, it is possible the sale will net proceeds in excess of the debt that was owed on the real estate. The lender and any lien holders must be compensated first. If any funds remain after all debts are cleared, the excess will go to the borrower.
Judicial foreclosure refers to foreclosure proceedings on a property in which a mortgage lacks the power of sale clause, and so proceeds through the courts. Judicial foreclosure, however, is a long process, which can take several months to years to complete.
In some states, borrowers have the right to reclaim foreclosed property if certain terms are met. This is called the right of redemption and gives property owners who pay off their back taxes or liens on their property the ability to prevent foreclosure or the auctioning off of their property, sometimes even after an auction or sale has occurred.