What Is An Acceleration Clause? Advice For Homeowners
It’s essential to understand the fine print when signing any type of loan document, especially when you’re buying a home. We look at these documents but tend to glance over them, and an acceleration clause is usually one of those items.
An acceleration clause is a condition inside a contract that allows a lender to “accelerate” the repayment of your home loan if certain conditions aren’t met. The acceleration clause will outline the different situations in which a lender can demand loan repayment and how much of that repayment is required.
Wondering what happens when your loan is accelerated? We’ll dive into the details and what you can do if an acceleration clause is enforced on you.
Certain conditions may breach the loan agreement and give lenders the right to impose accelerated repayments, including any of these situations:
- Missed mortgage payments: Laws and clauses vary, but lenders typically take action around the third missed payment.
- Bankruptcy filing: Bankruptcy may limit a lender’s ability to get their money back, so they may accelerate payments to protect themselves.
- Unauthorized property transfer: Lenders may enforce an acceleration clause if a property is transferred without their permission.
- Canceled homeowners insurance: Homeowners insurance is required for the full mortgage duration and canceling insurance may trigger the acceleration clause.
- Nonpayment of property taxes: Failing to pay property taxes could result in a lien against your home and trigger an acceleration clause.
- Creating an unlivable condition: Homeowners are responsible for maintaining their property, and an unlivable condition can result in acceleration.
Usually, these acceleration clauses aren’t automatic. When you’ve done something to activate an acceleration clause, your lender will send a mortgage acceleration letter outlining the amount owed.
While each lender has their own timeline for this type of mortgage acceleration, most wait 90 days after the first missed payment to send out the letter.
Lenders will also usually give borrowers a 30-day notice to repay the loan or come up with a financial plan. If the borrower is able to clear their default before the clause is invoked, the lender may lose their right to acceleration.
There are generally five steps for a lender to accelerate a loan, and borrowers have a few options when handling the situation.
- The borrower defaults or creates another situation that meets the acceleration clause’s criteria.
- Most lenders will send a breach letter allowing the borrower to remedy the situation within at least 30 days before acceleration.
- If the default isn’t cleared, the lender can invoke accelerated payments by sending an acceleration letter.
- The borrower is required to pay the remaining balance in full, agree to a short sale or home transfer, or enter foreclosure proceedings.
- The borrower may also have options to reinstate the loan after acceleration.
The easiest way to avoid accelerated payments is to maintain a good standing with your mortgage servicer. This includes making timely and complete payments, paying all homeownership costs like homeowners insurance and property taxes, and maintaining your property.
If you’re worried about affording your monthly payments, contact your servicer immediately to learn about their mortgage assistance options. You can also refinance to reduce your monthly costs and avoid falling behind.
Federal laws require that lenders wait 190 days after a missed payment to begin foreclosure, so homeowners do have a window of opportunity to catch up on late payments and fees. Once caught up, mortgage payments resume as normal.
But when money’s tight, it’s hard to catch up on a defaulted loan. Borrowers who can’t afford to repay past due amounts may have to consider these other options to maintain their mortgage or settle the situation with their lender.
Mortgage Acceleration Repayment Plans
One option is to request a mortgage reinstatement. It comes in the form of a quote and will go over exactly how much you need to pay to catch up on missed payments, plus any other fees.
Once you pay the requested amount, you’ll no longer be in default and can start making your regular payments.
Some lenders are flexible and may even make a repayment plan available so you can catch up on defaulted payments without a large lump sum payment.
Homeowners who owe more on their home than it is worth and can no longer afford to make payments might consider a short sale, but lenders will only agree to short sales under certain circumstances.
Typically, the property must have declined in value or the homeowner must be experiencing financial hardships that make repayment or selling the home to pay off the full mortgage impossible.
Owners should consider the impact a short sale can have on their credit score and financial future.
Homeowners who can’t repay the default will enter the preforeclosure process, which is a period to take advantage of any of the above options to catch up on payments. If repayment still isn’t feasible, the property could be foreclosed on and sold to cover outstanding debt. But this is the last resort and represents a loss for everyone involved.
Before you find an acceleration letter in your mailbox, you should contact your lender as soon as you’re struggling to make mortgage payments. Explaining your financial situation allows your lender to detail what mortgage assistance options they can offer to help you avoid foreclosure.
Housing counselors are also available to homeowners through the Department of Housing and Urban Development (HUD), who can provide budgeting assistance and financial advice based on your situation.
Below are additional resources to help with your loan repayment:
- Fannie Mae Loan Lookup – for borrowers with a Fannie Mae-owned loan
- Freddie Mac Loan Lookup – for borrowers with a Freddie Mac-owned loan
- Homeowner Assistance Fund – for homeowners impacted by COVID-19
- VA Counseling – available for veterans and active service members to avoid foreclosure on VA loans
There are federal and local resources available to assist struggling homeowners, but stay cautious of foreclosure rescue scams that ask for fees upfront. If you’re unsure if assistance is genuine, contact your lender or HUD.
Accelerating a mortgage isn’t anybody’s ideal situation, but financial hardships happen. Here are some additional insights that can help you avoid acceleration or better understand your loan’s expectations.
Are Acceleration Clauses Legal?
Acceleration clauses are very common and legal in repayment contracts. However, local regulations vary. It’s important to check with the attorney who handled your closing to make sure this clause is abiding by your state’s laws.
How Can You Avoid An Acceleration Clause?
The best way to avoid triggering acceleration is to stay on top of your mortgage payments. If you find yourself falling behind, you have options when it comes to avoiding an acceleration clause.
Work with your lender to figure out a loan modification or repayment plan to make the delinquent payments. Lenders want to avoid foreclosure, too, so many servicers have mortgage assistance programs. Federal counselors are also available for financial assistance.
Keep in mind that the borrower will be responsible for paying for the costs the lender incurred while working on the mortgage acceleration.
Do Lenders Have To Disclose An Acceleration Clause?
According to the Supreme Court, no. The Truth In Lending Act (TILA), which regulates mortgage disclosures, doesn’t require a lender to disclose an acceleration clause.
What Factors Do Lenders Consider Before Enacting Acceleration?
If you’ve spoken with your lender about your financial situation and sought assistance, they may be more lenient with your repayment and avoid invoking acceleration for an extended time. However, if any of the situations below occur, your lender may have the right to request accelerated payments:
- Multiple missing mortgage payments
- Bankruptcy filing
- Unauthorized property transfer
- Canceled homeowners insurance
- An unlivable property condition
What’s The Difference Between Alienation and Acceleration Clauses?
Both alienation and acceleration clauses are common additions to real estate contracts that allow a lender to demand full repayment of the debt, though alienation clauses pertain to the sale of a property, while acceleration clauses affect homeowners who violate their contract agreements.
An alienation clause is invoked when a homeowner sells a home with a lien, at which point the homeowner is responsible for repaying the mortgage and interest in full to the lender before transferring the property’s title to a new owner. There are exceptions to this clause’s enforcement, including death, divorce and other mortgage situations.
An acceleration clause also invokes the borrower to repay their loan balance in full, but as a penalty for violating the loan’s terms. This can include missed payments, bankruptcy, canceled homeowners insurance and more.
The Bottom Line: Prioritize Your Payments To Avoid Mortgage Acceleration
One way to ensure that you don’t end up in a situation where an acceleration clause would need to be enforced is to refinance to a lower monthly payment before you go into default.
While there are many financial benefits to refinancing before defaulting, most people wait until it’s too late before they start the process.
The longer you wait, the harder it will become to refinance or to set up a repayment plan for your loan, especially if you have allowed a few late payments to get on your credit report. If you’re looking at your budget and can see that you’re going to start running into some issues in the next few weeks or months, reach out to a home loan specialist to see what refinancing options could be available to you.
Ready to start? Get approved for a mortgage refinance today.