If you’re purchasing a home soon, it’s likely you will need financial assistance. Before you take out a mortgage, it’s important to understand how they work and all the clauses that might be included.
Here is what you need to know about an acceleration clause before you decide to sign the papers:
What is an acceleration clause?
An acceleration clause is a clause that allows a lender to “accelerate” the repayment period of a certain loan.
But don’t worry! The lender can only do this if the borrower fails to meet certain pre-agreed upon requirements. Lenders can’t just randomly accelerate a loan.
An acceleration clause is also sometimes referred to as an acceleration covenant. Its purpose is to protect the lender in case a borrower defaults (or is about to default) on the loan.
Your lender enforces acceleration clauses. And, since they are a legal contract, the local court system does as well.
How does an acceleration clause work?
An acceleration clause is a contract. Usually, an acceleration clause requires that the borrower pay the balance of their loan in cases of extreme payment delinquency or even in the event of default.
When the borrower pays off the full balance, they are essentially freed from their loan and are not obligated to pay off any further interest on the real estate.
Special Cases for Acceleration Clauses
Acceleration clauses are typically based on extreme payment delinquency. However, there could be cases when the entire balance of a loan is due and payable after only one missed payment.
To be sure which kind of situation you’re in, be sure to read your loan agreement thoroughly before you sign it.
Selling or transferring the property to another party can also invoke an acceleration clause. This means that if you sell your home without securing the mortgage, the lender’s initial investment in you would be protected.
Something to keep in mind: if you transfer your property to one of your heirs, your lender cannot trigger the acceleration clause.
Sometimes your mortgage lender can also invoke the acceleration clause for things like canceling your homeowners' insurance, not paying your property taxes on time, or not properly maintaining the property. However, these things do not happen that often.
Violating an Acceleration Clause
Let’s say you have a 30-year mortgage on your home. In year 15, you fail to make three payments in a row. Your original promissory note states that three missed payments would trigger the acceleration clause.
So, after you miss your payments, your lender will contact you immediately requesting that you pay up the remaining balance of your mortgage loan. If you have the money, you can hand it over to become the title-owner of the property and enjoy uncontested ownership.
However, if you do not have the money (which is often the case), then your lenders consider you in breach of your contract. When a lender accelerates a loan that is in default, they now have the right to put your home into foreclosure and resell it to recover the funds.
What To Do if Your Mortgage Is Accelerated
Something nice about acceleration clauses is that they are not sentient beings that bring themselves into existence. Your lender must activate acceleration clauses! This means that even if you meet all of the criteria for triggering it, it does not happen automatically.
Someone in your lending office must physically put the wheels in motion. So, if you’re on the road to suddenly owing the entire balance of your mortgage, don’t panic. If you’re able to catch up on payments before your lender officially pulls the trigger, then they typically lose the right to make your entire balance due on transfer.