What Is Power of Sale?

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.

Understanding Power of Sale

Power of sale is language added to a mortgage document that allows the lender to sell the property if the mortgage payments are not met. The clause allows the lender to repay the mortgage debt by selling the property to recoup what was owed. A property that is foreclosed is sold by the lender in order to recover losses incurred by the loan default.

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 must file litigation to bring the case to court.

The power of sale clause thus invokes 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 to 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.

Power of sale also refers to the power expressed or implied in a trust agreement permitting the trustee to sell the investments comprising the trust.

Key Takeaways

  • Power of sale is a mortgage clause that permits the lender to foreclose on and sell a property in default in order to recover proceeds.
  • This clause, which is legal in most 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 his or her property by paying back all interest and principal due as well as all foreclosure costs.

How Power of Sale Is Applied Without Court Proceedings

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, lasting several months to years to complete.

More than half of all states allow power-of-sale clauses to be used to enact 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 take charge of conducting the foreclosure sale. Each state that allows power of sale terms in mortgages might set minimum requirements for giving notice of foreclosure. It is possible that the borrower will have 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 in some states might 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.

Right of Redemption

Right of redemption is the legal right of a mortgagor or borrower who owns real estate to reclaim his or her property once certain terms have been met. The right of redemption 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. The amount paid generally must also include the costs incurred in the foreclosure process, plus the entire amount of the mortgage if the payoff comes after foreclosure or auction.