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Acceleration Clause In Real Estate: Defined And Explained

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Published on November 6, 2020
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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 items but tend to glance over them, and an acceleration clause is usually one of those documents.

In this article, we’ll discuss what acceleration clauses are, how they work and what to do if you are in the process of having one enforced on you.

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What Is An Acceleration Clause?

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 a lender can demand loan repayment and how much repayment is required.

What Triggers An Acceleration Clause In Real Estate?

An acceleration clause can be put into place for a number of reasons, including missing payments or filing bankruptcy. Usually, when you have done something to activate an acceleration clause, you’ll receive a mortgage acceleration letter from the lender outlining the amount that is owed. Let’s review a few situations that could trigger an acceleration clause in your loan agreement:

Missed Mortgage Payments

If you miss a certain number of mortgage payments, your lender can start the process of enforcing an acceleration clause. However, if you catch up on your mortgage payments before they try to enforce anything, they could lose their right to use the acceleration clause at that time.

Bankruptcy Filing

Filing for bankruptcy is another quick way to have an acceleration clause triggered in your loan agreement. Essentially, a bankruptcy puts the lender in a position of being unable to get their money back, so it’s another way of protecting themselves.

Unauthorized Property Transfer

If you try to transfer your property without your lender’s permission, they have the right to enforce the acceleration clause. This could be transferring property to either a person or a business.

Canceled Homeowners Insurance

An important thing for lenders is to make sure their collateral is protected, and one way they do this is by requiring that you have homeowners insurance on the property for the loan term. If you cancel your homeowners insurance at any time during your loan term, your lender has the right to enforce an acceleration clause.

Not Keeping Home In Livable Condition

If you don’t keep your home in a condition that is considered “livable,” the mortgage company can trigger an acceleration clause as well.

An unlivable home is usually extremely dirty, shows signs of no regular upkeep, lack of proper building construction, buildup of garbage and shows an extreme lack of cleanliness.

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Your Options After A Loan Acceleration

When money is tight, it’s easy to end up on the wrong side of an acceleration clause.

If you miss too many mortgage payments or drop your home insurance, you could end up having this provision enforced.

Here are some options you can consider if something like this happens to you:

Set Up A Repayment Plan

One option you have is to request a mortgage reinstatement. It comes in the form of a quote and will go over exactly how much you would need to pay to catch up on your 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.

You can set up a payment plan before the foreclosure or even during the foreclosure process.

Accepting Foreclosure

If you’re in a situation that prevents you from repaying the home loan, you’ll be in what is known as the preforeclosure process.

During this phase of the foreclosure, you have the opportunity to do things like catch up on your payments, try to refinance your loan, or even complete a short sale to prevent the foreclosure from affecting your credit.

When payments can’t be made and you would rather avoid the entire process of a foreclosure, you could surrender your home to the lender.

Acceleration Clause FAQs

Are acceleration clauses legal in real estate?

Acceleration clauses are very common in repayment contracts. However, it’s important to check with the attorney who handled your closing to make sure this clause is abiding by your state’s laws. The laws regarding acceleration clauses can vary depending on the state the borrower lives in.

How can I avoid an acceleration clause?

Borrowers do 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. Keep in mind that the borrower will be responsible for paying for the costs the lender incurred while working on the mortgage acceleration.

When do lenders send out mortgage acceleration letters?

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 the borrowers a 30 day notice to repay the loan or come up with a financial plan.

The Bottom Line: Stay On Top Of Your Payments To Avoid Triggering An Acceleration Clause

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 refinance options could be available for you.

Ready to start? Get approved for a mortgage refinance today.

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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.