On average, 5 million households in the US were struggling to make their monthly mortgage payments in Q2 2023. This increases the chances for the borrowers to default on their mortgage payments.
In order to safeguard their investment and avoid any loss, the lenders invoke an acceleration clause.
A mortgage agreement is comprised of certain legal sections. An acceleration clause is a provision that grants the lender the legal right to claim immediate repayment of the loan.
Accleration Clause- An Overview
- The lenders can demand immediate repayment from the borrower in case they don’t meet specific conditions.
- When an acceleration clause is invoked, the lender sends a formal mortgage acceleration letter to the borrower.
- The letter of acceleration outlines the reason for the acceleration, the outstanding balance, and the consequences of non-payment.
- The borrower can opt for refinancing, consider a deed in lieu of foreclosure, or a short sale to avoid the implications of the clause.
What Is an Acceleration Clause?
An acceleration clause is a legal provision, drafted to protect the lender’s interests. It permits the lender to demand an immediate mortgage repayment. Usually, this clause is invoked if the borrower defaults to make monthly payments.
However, several other borrower violations can trigger the clause. Contract violations such as a change in homeownership without the lender’s consent, and property damage. etc, invoke this clause.
Furthermore, the lender notifies the borrower of invoking the acceleration clause by sending a formal mortgage acceleration letter.
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What Is a Mortgage Acceleration Letter?
The lender sends a mortgage acceleration letter as a formal communication to the borrower. The letter usually includes the following information:
- Reason for Loan Acceleration: The letter will state the exact reason for the acceleration. This may include missed mortgage payments, not maintaining insurance on the property, or any other violation of the mortgage contract.
- Outstanding Balance: The letter will state the total amount of money the borrower owes on the mortgage. This will include the missed payments and pending interest.
- Consequences of Non-Payment: Normally, the borrower gets 30 days to respond to the lender. If the borrower fails to repay the outstanding amount within the deadline, foreclosure will be implemented.
Additionally, in rare cases, the letter may also mention potential alternatives or options for the borrower to avoid foreclosure.
When Is an Acceleration Clause Triggered?
The clause is triggered when specific conditions outlined in the mortgage agreement are not met. The most common triggers are:
1. Defaults in Mortgage Payments
Failed repayment installments are the most common cause that triggers the acceleration clause. In most mortgage agreements, even a single missed installment can be the reason.
2. Lapse of Homeowner’s Insurance
Most lenders require the borrower to maintain homeowner’s insurance. In the case of property damage, the lender can utilize the insurance money to restore the value of the property.
However, instead of accelerating the loan, the lender may get ‘force-insurance’ (the lender buys the insurance and the borrower pays).
3. Defaults in Property Tax Payments
The local government can place a lien on the borrower’s property if they fail to pay the property tax. Moreover, they can also seize their home. In this case, the lender invokes the acceleration clause to safeguard their investment.
4. Bankruptcy
The lender may trigger the clause if the borrower ever files for bankruptcy. This can happen in case the ‘automatic stay’ stops the lenders from recovering their money.
However, the rules and implications of bankruptcy depend on the type of bankruptcy and the borrower’s local jurisdiction.
5. Transfer of Ownership
In the event that the borrower transfers the property without notifying the lender, the latter can invoke the acceleration clause to protect their rights to the property.
The ‘due-on-sale’ clause in the mortgage agreement specifically protects the lender against unauthorized property transfer.
Why Do Lenders Accelerate a Loan?
It’s important to remember that the lender only chooses to accelerate a loan as a last resort. When a borrower demonstrates signs of increased credit risk, the lender may decide to accelerate the loan to protect their investment.
This action ensures they can recoup their money quickly if the borrower’s financial situation worsens.
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How to Avoid Mortgage Acceleration?
Mortgage acceleration is a rare occasion. Most lenders will be open to a loan modification or new repayment plan to cover pending payments. Follow the below-listed steps to avoid foreclosure on your property in case the acceleration clause is triggered:
- Refinance: Refinance of a mortgage means that you take a new loan to pay off the existing defaults. You can opt for a refinance if you have enough equity in your house.
- Forbearance: Ask your lender about forbearance. It will allow you to reduce or pause mortgage payments, while you get your finances on track.
- Deed in Lieu of Foreclosure: If you want to avoid foreclosure, you can consider a deed in lieu of foreclosure. With this option, you voluntarily transfer ownership to the lender. However, this can impact your credit score.
- Short Sale: In a short sale, the lender will agree to sell the property for an amount lower than your outstanding mortgage balance. The money from such a sale will become the full payment for the loan.
Furthermore, you can avoid mortgage acceleration by simply communicating with the lender on time. Talk to the lender candidly if you are facing financial troubles and are unable to make regular payments.
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Bottom Line
Homeownership is a dream to fulfill for many buyers. However, for first-time homebuyers, real estate can be complicated.
It is therefore important to understand legal real estate terms such as acceleration clause, mortgagee clause, etc., to make a wise and informed decision.
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Frequently Asked Questions
How to find mortgage information on a property for free?
To find mortgage information on a property, contact your mortgage lender directly. You can also use the online platforms of the county recorder, clerk, or assessor’s office to perform an address-based search.
How does an acceleration clause help lenders?
An acceleration clause helps lenders by reducing the risk of defaults and providing an efficient way to recover outstanding loan amounts. It serves as a powerful tool to protect the lender's interests and ensure timely loan repayment.
What's the difference between an acceleration clause and alienation clause?
An alienation clause is activated when you sell your home, whereas, an acceleration clause becomes effective when you fail to meet your loan terms.
When is an acceleration clause usually invoked?
An accelerated clause is invoked when the borrower breaches the loan agreement.
