Power of sale is a mortgage contract clause that gives the lender the right to sell the property to recoup their investment in the mortgage loan when the borrowers are in default.
When power of sale is included in a mortgage contract, the lender has the right to foreclose on the property without going through a judicial foreclosure. Understand the process of the power of sale, its possible benefits to homeowners, and when it may be legal.
Definition and Examples of Power of Sale
Power of sale is a clause in a contract that allows a lender to take control of a property in order to sell it after the borrower has defaulted on the loan. It often results in a faster foreclosure process because the clause allows lenders to bypass the court’s judicial review in many cases.
Not every state allows power of sale, but many do. Understanding what power of sale means for a particular mortgage loan can help you evaluate your options if you’re in danger of defaulting on a home mortgage.
Power of sale, for instance, can coexist with a legal right to redemption, which can give a homeowner the option to get their home back from foreclosure if they pay the loan balance and applicable fees.
- Alternate name: Nonjudicial foreclosure, statutory foreclosure
The exact terms of when power of sale can be invoked depend on the state’s laws and on the terms of the mortgage, but it occurs when the mortgage is in default. For example, power of sale foreclosures in North Carolina require authorization from a clerk of the superior court, while foreclosure “by civil action” involves a judge.
In states that do not allow power of sale foreclosures, the process of judicial foreclosure generally requires a judge to hear the civil action case. The courts remain involved when the home is sold, lengthening the process.
How Does Power of Sale Work?
According to federal law, foreclosure proceedings cannot begin until a borrower is more than 120 days delinquent on their loan. If this date passes without an alternative arrangement to avoid foreclosure, a lender can begin the proceedings for a nonjudicial foreclosure in the states where they can occur.
Individual state laws on the use of these clauses can vary significantly, so check your state’s versions of judicial versus non-judicial foreclosure to understand your own rights and responsibilities. Looking at the power of sale clause language in your mortgage can shed light on the situation as well.
The process tends to begin with notices of default after multiple months of missing mortgage payments, though the length of time before a power of sale process begins varies. Homeowners may have legally mandated waiting periods to see whether or not they can successfully exit default and regain good standing with their lender.
Even after foreclosure starts, many states give homeowners a redemption period, which can extend even after a foreclosed property is sold in some cases.
The right to redemption can be invoked during a foreclosure if a borrower finds a way to pay off the entire balance of the mortgage, often with other fees as well. Redemption periods can vary, but in many states they are six months following the sale.
Nonjudicial foreclosures with power of sale often take less time than judicial foreclosures, which can continue for many months or even years. Nonjudicial foreclosures may be concluded in a matter of a few months, although they may require judicial review to make sure the proceedings were legal.
Benefits of Power of Sale
A benefit of this clause is that the borrower may receive some proceeds from the sale, if it sells for more than their total outstanding debt and any other liens on the property. These funds are known as “surplus funds,” and are returned to the former homeowner in many cases.
The power of sale clause can save court time and expedite processes for lenders. For borrowers, its specific benefits vary depending on state laws. Homeowners with a mortgage should understand how power of sale is treated in their state and in their particular mortgage contract, as the terms vary from lender to lender.
- Power of sale clauses in mortgage loans allow lenders to pursue nonjudicial foreclosure and sell the property after the borrower defaults.
- Not all states recognize nonjudicial foreclosure rights, but many do.
- Borrowers may have a right of redemption that allows them to end the power of sale foreclosure proceedings if they pay their balance and fees within a certain timeframe.