What is an Acceleration Clause?
An acceleration clause is a term in a loan agreement that obliges the borrower to repay the loan immediately under certain conditions.
An accelerated clause is usually invoked when the borrower is in serious breach of the loan agreement.
An acceleration clause, sometimes called a covenant, is the part of your mortgage agreement that defines the terms under which the lender can demand full repayment of the loan. In other words, it will accelerate the repayment of the amount you borrowed plus any interest accrued after the clause is triggered until the full repayment is made.
For example, mortgages typically have an accelerator that is triggered when the borrower misses too many payments. Acceleration clauses are most common in commercial and residential mortgages. They also appear in some rental agreements.
For example, suppose a borrower on a five-year mortgage loan makes no payment in the third year. The terms of the loan contain an acceleration clause that states that the borrower must repay the remaining amount if payment is not made. The borrower would be contacted immediately by the lender to pay the balance in full.
When the borrower pays, they gain ownership of the property and take full ownership of the property. If the borrower is unable to pay, they are considered to be in breach of contract and the lender can seize and seize the property for resale.
However, an accelerated clause can also allow the borrower to repay the loan in full before to the loan’s maturity date.
Are Acceleration Clauses Legal?
It might sound harsh to ask for full repayment, but the alternative would force lenders to sue every month for the life of the loan if you fail to make a payment, which would not be the preferred outcome. For this reason, acceleration clauses are included in all repayment agreements.
However, mortgage acceleration and foreclosure laws vary greatly depending on the state you live in. So be sure to check your state’s laws on speeding up.
If you have any questions about the legality of the acceleration clause in your mortgage agreement, contact the attorney who handled your closing. They should have reviewed it at that time and will be able to tell you if the language is standard and what your legal options are where you live.
What Triggers an Acceleration Clause?
There are several things that can trigger an accelerator clause in your loan agreement. Let’s go through them quickly.
The most common scenario is missed mortgage payments. As mentioned above, theoretically, a lender can call your loan due for just one missed payment, depending on the terms of your mortgage agreement. Typically, however, you will have to miss two or three mortgage payments before a lender will decide to take this step.
Although missed payments are the usual cause, the following are fewer common reasons for a loan acceleration.
1. Cancellation of Homeowners Insurance
Your lender will require you to have home insurance so that the property can be repaired in the condition it was in before the damage. The lender needs to be confident that they can get the greatest possible value out of the house in case you ever default.
Therefore, one of the things that is usually included in an accelerator clause is a trigger when you cancel home insurance. In practice, the lender is more likely to take out insurance for you and make you pay for it (called “compulsory insurance”), but they have this option.
2. Nonpayment of Property Taxes
If you don’t pay property tax, your local government can place a lien on your property and eventually seize it all together. Hence, another option often found in accelerator clauses is the ability to expedite your loan if you miss a payment.
In practice, your mortgage lender is more likely to put you back in escrow to make sure your property taxes and home insurance are paid by gradually adding them to your monthly mortgage payment.
3. Bankruptcy Filing
If you file for bankruptcy, it can trigger the accelerator clause in your mortgage agreement. The reason for this is that your bankruptcy filing will jeopardize your lender’s ability to exercise their rights if you default.
4. Unauthorized Property Transfer
Finally, acceleration may be triggered if you attempt to transfer the property to another person or to an LLC without your lender’s prior permission. Your mortgage contains a due on sale clause which is violated by any transfer of property, and that will trigger a mortgage acceleration.
Invoking the Acceleration Clause
Acceleration clauses are most common in mortgage and real estate loans. Because these loans are typically so large, the clause helps protect the lender from the risk of default by the borrower. A lender may choose to include an accelerator clause to mitigate potential losses and have greater control over the real estate associated with a mortgage loan.
With an acceleration clause, a lender has a greater opportunity to foreclose the property and take possession of the home. This can be beneficial to the lender when the borrower defaults and the lender believes it can gain value by reselling.
What If you Can’t Pay What You Owe?
Losing your home in foreclosure is quite uncomfortable, certainly for you, but also for your lender who would almost certainly lose money in the event of a foreclosure. Since lenders prefer not to own real estate, borrowers typically have a variety of options available to help them get their loan payments back up to date.
If you have adequate equity in your home, you may be able to refinance to significantly lower your monthly payments. Use our refinance calculator to see how your monthly payments might change.
1.1 Rate and Term Refinance
By applying for a rate and term refinance, you could trade a high monthly mortgage payment for a much lower one. For example, if you currently have a 15-year fixed mortgage and choose to refinance to a 30-year fixed-rate mortgage, your monthly burden would be significantly lightened.
1.2 Cash-Out Refinance
If you have suddenly lost an income, you may not realize how much cash you have accumulated in your home. A cash-out refinance will make that cash work. If you need a mattress while looking for a new job or business opportunity and you have enough capital, you may be able to take a substantial sum out of your home that can help you.
If you are falling behind on your mortgage payments and are currently unable to repay what you owe, you should speak to your lender immediately about whether you qualify for forbearance. A forbearance temporarily stops your mortgage payments.
Due to COVID-19, forbearance programs are in place to help the many homeowners who have been delayed due to COVID-related economic misfortune.
3. Deed In Lieu Of Foreclosure
If you are hopelessly behind on your payments and have no prospect of being able to pay what you owe, your lender may propose that you sign a deed instead, which will transfer the ownership of your home to the lender and allow you to avoid foreclosure on your credit history. Lenders prefer deeds to have to enter the foreclosure process because it is faster and less expensive.
However, if the sale of your home does not cover what you owe, the lender may be able to sue to recover its losses.
4. Short sale
In a short sale, the homeowner in default finds a buyer for the property who is willing to pay less than the homeowner owes on the mortgage. To complete the sale, the owner must seek the approval of the lender, because as long as the lender has a lien on the property, the owner cannot simply sell it.
Lenders will generally approve short sales if the property is no longer worth what it was when the mortgage originated and the homeowner can show that he is having financial difficulties.