Acceleration clauses: What they mean and how they work
When you take out a mortgage, it can feel like you have all the time in the world to pay it off. Seeing as the most popular loan option is a 30-year fixed rate loan — and it’s not even remotely close — that’s an understandable mindset to take.
But what if you had to pay the full balance of your home loan all at once?
If you have an acceleration clause in your mortgage agreement, your lender could exercise that term and demand repayment in full. That may sound like a nightmare scenario (and rightfully so), but mortgage lenders only put acceleration clauses into effect under select circumstances.
Whether you’re thinking of buying a new home or looking to refinance your existing mortgage, you’ll want to keep an eye out for these lending terms. And if you do have an acceleration clause built into your mortgage agreement, it’s essential you understand when it can be invoked and what recourse you have if your lender chooses to use it. Let’s review everything you should know about acceleration clauses so you can avoid any unpleasant surprises with your home loan.
What is an acceleration clause?
Broken down to its core fundamentals, a mortgage is a financial agreement between a borrower and a lender. The lender gives you the money to buy a house, and you repay that loan over a set amount of time — plus interest, of course. It’s a win-win arrangement most of the time, but if you violate that agreement, the lender could invoke an acceleration clause.
Accleration clause definition
An acceleration clause is a loan term included in a mortgage agreement that allows the lender to cancel the contract and then require the borrower to repay the remaining loan balance in full. Loan acceleration needs to be triggered to go into effect — for instance, if consecutive monthly payments have been missed.
Missed payments are the most common acceleration triggers, but lenders may include other terms borrowers need to meet to avoid this situation. The number of delinquent payments a lender will accept before invoking a mortgage acceleration clause varies quite a bit as well. It’s very important to read the fine print of your mortgage agreement so you understand your financial responsibilities.
What happens if the lender exercises the acceleration clause?
If you violate the terms of your mortgage agreement and the lender invokes the acceleration loan provision, then you’ll receive an official notice in the mail. This acceleration letter — sometimes called a breach letter — will give you all the details you would need to know in this situation:
- Why your lender is canceling your mortgage agreement
- How much you still owe on your home loan
- When the full payment is due
There are a few different scenarios that could play out after you get an acceleration letter:
- Pay off the remainder of your loan balance
- Modify the terms of your mortgage
- Default on your mortgage
- Refinance your mortgage
Pay off the remainder of your loan balance
The simplest — although by no means the easiest — way to respond to an acceleration letter is to repay the full amount of your home loan plus interest. You’ll satisfy the terms of your deal, receive the title on your home and then own your house free and clear.
Let’s be honest, though, very few people have the funds on hand to repay the full balance of their mortgages. And anyone who’s missed a few mortgage payments probably has tighter finances than most households. Paying off your entire loan balance is pretty unrealistic, but it’s the best-case scenario available.
Modify the terms of your mortgage
Lenders may be willing to work with borrowers who have run into financial hardship and are having trouble keeping up with the monthly mortgage payments. They could adjust the terms of your mortgage to accommodate your new financial situation. If you’ve proven to be financially responsible in the past — in other words, staying current on your mortgage installments (recent history, notwithstanding) — and have a good relationship with your lender, then they may offer some assistance.
Not all mortgage companies are open to this solution, though. That’s why it’s so important to look beyond interest rates alone when vetting lenders and to choose one that you can trust.
Default on your mortgage
At worst an acceleration mortgage clause can lead to a loan default and, eventually, foreclosure. With these loan terms written into your contract, your lender would be within its legal rights to foreclose on your home and seize it. They would then turn around and sell the property to recoup the loss on the defaulted loan.
The good news is lenders want to avoid foreclosures if at all possible. It’s a pretty drastic step for mortgage companies to take — a last-ditch effort to minimize the damage and fallout from a delinquent borrower. If there are other options on the table that keep your home loan in good standing and ensure that monthly payments resume without incident, then your lender may very well choose that alternative over foreclosure.
Refinance your mortgage
Speaking of alternatives, refinancing your mortgage can be a good way to get a handle on housing costs that push your budget to the breaking point. You could potentially refi to get a lower interest rate, loan term or loan type that helps bring those expenses down:
- Reducing your interest rate would mean you owe less interest on your mortgage each month.
- Extending the length of your loan — say, from a 15-year to a 30-year fixed rate loan — would also reduce your monthly payments.
- Changing loan types — going from a fixed rate to an adjustable rate mortgage, for instance — could also impact what you owe each month.
If nothing else, always reach out to your lender if you receive an acceleration letter. Try to work something out if you can’t afford to repay your entire loan balance so you can avoid foreclosure.
What triggers an acceleration clause in real estate?
Look closely at the fine print in your mortgage agreement, and you’ll likely find multiple scenarios where your lender may choose to invoke an acceleration clause. There are several common triggering terms in real estate agreements:
- Poor property condition
- Change in title
- Missed payments
- Lapsed homeowners insurance
Even if you stay current on your housing costs, lenders could get cold feet if your overall financial status gives reason for concern. Filing bankruptcy could cause your mortgage company to execute an acceleration clause to avoid falling behind other creditors and losing out on its investment.
Poor property condition
Again, it’s in your lender’s best interest that your home retain its market value as collateral. Letting it fall into disrepair will strip away that value — and that could lead to mortgage acceleration.
Change in title
If the property were to change hands, transferring ownership to another person, then your lender could use an acceleration clause to demand full repayment of the original loan.
Although generally handled under due process through to foreclosure, a lender could exercise an acceleration clause if the borrower misses too many payments. Some lenders may even demand loan repayment after a single missed mortgage installment.
Lapsed homeowners insurance
Homeowners insurance exists for the benefit of both borrower and lender. Keep in mind that the property itself serves as collateral for any mortgage. Damage or loss of value to the home means there’s less collateral to protect the lender’s investment. As such, losing your homeowners insurance — whether intentionally or not — could signal to your mortgage provider that you’re a risky borrower. Force-placement clauses usually cover these situations, but a lender may choose to handle a case of lapsed insurance through the acceleration clause.
How much time do you have to address mortgage acceleration?
As you might have already guessed, loan acceleration timetables can depend on the lender’s own guidelines as well as the severity of the violation. Even so, there are a few common practices that many mortgage companies will stick to when it comes to laying out a timeline for mortgage acceleration:
- Lenders may wait 90 days after the first missed payment to send out a breach letter.
- Lenders often give at least 30 day’s notice for the borrower to repay the loan or work out another arrangement or filing foreclosure proceedings.
- In many cases, federal laws require mortgage companies to hold off on foreclosure proceedings until 120 days have passed from the initial default or violation.
Again, these are, for the most part, general industry practices. By no means are they all set in stone, but this should give you an idea of how much breathing room there is if you don’t adhere to all of your mortgage clauses.
Where to find mortgage acceleration clauses
When you go to the closing table, your real estate attorney will present you with a pile of paperwork to sort through. Among the many closing documents you need to review and sign is the promissory note — also known as a mortgage note. This piece of paper certifies your commitment to repay your home loan over a set period of time. The promissory note is also one of the most likely places to find acceleration clauses in your mortgage agreement.
You’re also sure to find acceleration clause terms listed in the deed of trust. In fact, you’ll likely find even more details pertaining to the clause there. Be sure to check both documents for any information related to these loan terms.
The exact layout of a mortgage note can vary — sometimes you’ll see the acceleration clause clearly marked at the top of the document, but other times it may not stand out so clearly. The terms of your promissory note should detail what obligations you need to meet as a borrower to avoid loan acceleration. If you don’t see those terms — or anything relating to mortgage acceleration, for that matter — listed under the promissory note, be sure to ask your attorney about an acceleration clause.
How to avoid loan acceleration
When it comes to acceleration clauses, the best offense is a good defense. While your lender may be willing to work with you to find a repayment arrangement that allows you to retain possession of your home and catch up on past-due installments, it’s far better to avoid this situation entirely. Here are a few tips to continually meet the terms of your mortgage agreement and stay in good standing with your lender:
- Stay on top of your monthly payments: Obvious? Yes, but the best way to stave off loan acceleration — and foreclosure — is to pay your mortgage each month. Prioritize your housing costs and budget accordingly so you can always meet those financial obligations.
- House hunt within your budget: Everyone would like to live in the nicest and largest home possible, but overextending your finances to pay for a house you can just barely afford isn’t feasible in the long run — even if you qualify for a large loan amount. Before taking on a mortgage, be sure to calculate how much home you can afford — factoring in other recurring debts and monthly expenses — and figure out what you’re comfortable spending.
- Keep your homeowners insurance up to date: A lapsed homeowners insurance policy is a sure-fire way to cause problems with your mortgage servicer. Make sure you have the right coverage in place to meet all of your lender’s insurance requirements. That may include additional hazard insurance to cover threats like earthquakes, floods and hurricanes.
- Maintain your property: This is just good advice all around. Keeping your home in good condition will help protect and even boost your home’s fair market value, which means your lender won’t have to worry about the state of its collateral.
Lenders often include acceleration clauses in mortgage agreements to minimize the risk of nonpayment and delinquency. These loan terms allow mortgage servicers to demand full loan payment in the event the borrower violates the loan contract. Usually, these clauses are triggered by missed payments, but there are other conditions to look out for, as well.
Mortgage acceleration can take you down the path toward foreclosure, so it’s very important that you understand when lenders are able to invoke these clauses and what your responsibilities are as a borrower. When applying for a mortgage, ask your loan officer if your loan agreement will attach an acceleration clause and, if so, what triggers you should avoid.
A home loan is a huge financial obligation, and you want to gather as much information as possible before you sign any contract. Then, budget and plan so you’ll be able to keep making your mortgage payments without breaking a sweat.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this article are for general informational purposes only.
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