Power of sale: Overview, definition, and example
What is power of sale?
Power of sale refers to a provision often included in a mortgage or deed of trust that allows the lender or mortgage holder to sell the property securing the loan in the event of a default by the borrower, without the need for court intervention. This process enables the lender to recover the outstanding debt by selling the property at a foreclosure sale. The power of sale is typically used in non-judicial foreclosure procedures, where the lender does not need to go through a lengthy court process to sell the property.
For example, if a homeowner fails to make mortgage payments, the lender may exercise the power of sale to sell the property and use the proceeds to pay off the mortgage debt.
Why is power of sale important?
The power of sale is important because it allows lenders to quickly recover their loan balance in the event of borrower default, without the need for time-consuming and expensive court proceedings. This can be beneficial for both parties: the lender can secure the repayment of the loan more efficiently, while the borrower may benefit from a quicker resolution of their debt issue. For borrowers, however, it also means they risk losing the property if they fail to meet their obligations under the loan.
Understanding power of sale through an example
Imagine a homeowner takes out a mortgage loan and agrees to a power of sale clause in the loan agreement. After a period of missed payments, the lender decides to exercise the power of sale. The lender sells the property through a foreclosure auction to recover the loan amount. The proceeds from the sale are used to pay off the outstanding debt, and any surplus (if applicable) is returned to the borrower.
In another example, a borrower defaults on a car loan. The loan agreement includes a power of sale clause that allows the lender to repossess and sell the car to recover the loan balance. The lender sells the car at auction and uses the proceeds to pay off the remaining loan amount.
An example of a power of sale clause
Here’s how a power of sale clause might appear in a mortgage agreement:
“In the event of default by the Borrower, the Lender is granted the power of sale, and the Lender may, without court action, sell the property at a public auction to satisfy the outstanding balance of the loan. Proceeds from the sale will first be applied to cover the costs of the sale and the debt owed to the Lender, with any remaining funds being returned to the Borrower.”
Conclusion
Power of sale is a critical provision in many mortgage and loan agreements, providing lenders with a more efficient way to recover their funds in the event of a borrower’s default. It allows for the sale of the property without requiring court intervention, speeding up the foreclosure process. For borrowers, understanding the implications of a power of sale clause is essential, as it can lead to the loss of the property if they are unable to meet their loan obligations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.