Foreclosure by Power of Sale

Power of sale in a foreclosure proceeding results when a homeowner defaults on a loan and the mortgage lender sells the property to recoup financial losses. This form of sale is different than a judicial sale in that courts are not involved in the process. Some feel it is a quicker way to foreclose on a home; however, not every state can take part in it.

A Closer Look at Power of Sale

Usually, when a homeowner defaults on a loan, the mortgage lender puts the home up for auction in a process that is known as a judicial sale. Supervised by the court, this process ensures that all parties (mortgage lenders, homeowners, tax lien holders, etc) are included in the process. However, with power of sale, the lending company manages the sell of the home, accomplishing the same goals as with the judicial process, but without the court proceedings that can stretch out the process.

Disadvantages of Power of Sale

Not all states are allowed to handle foreclosure through power of sale. In fact, just over half allow this process to occur. This may be because there are challenges involved in the process that can make it a bit difficult. For example, the process is usually handled outside of court; however, if there is an issue regarding the title, the parties involved may still have to go to court to resolve it, which might essentially stretch out the process. Also, in a judicial sale, the mortgage lender can seek a “deficiency judgment” if money gained from selling the property does not cover the loan amount due; however, in a power of sale, this judgment may be prohibited.

What is a Deed of Trust?

Often times, when a foreclosure is handled through power of sale, a deed of trust is required. In this case, once the homeowner defaults on a loan, the mortgage lender places the property into a deed of trust, which conveys it from the lender to a trustee. This trustee holds the property in a trust until it is up for sale. Doing this allows the mortgage lender to bid on the property.

Whether a property will go through power of sale or the courts, depends on the state and mortgage lender. If you’re currently in the process of foreclosure, it’s good to learn which process your property is going through.