It’s essential to understand the “fine print” when signing any type of loan document, especially when you’re buying a home.
But here’s the thing:
We look at those items but tend to glance over them, and an acceleration clause is usually one of those things.
In this post, 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.
What Is An Acceleration Clause?
An acceleration clause is a condition inside a contract that allows a lender to “accelerate” the repayment of your 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?
An acceleration clause can be put into place for a number of reasons, including missing payments or filing bankruptcy. Let’s review those and a few other situations that could trigger an acceleration clause:
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 to your mortgage payments before they try to enforce anything, they could lose their right to use the clause at that time.
Filing for bankruptcy is another quick way to have an acceleration clause triggered. 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 it to either a person or a business.
Canceled Homeowners Insurance
An important thing for a lender 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, the 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.
Usually, when you have done something to activate an acceleration clause, you’ll receive a letter from the lender outlining the amount that is owed.
Your Options After A Loan Acceleration
When money is tight, it’s easy to end up on the wrong side of this 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 that 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 with other fees.
Once you pay the requested amount, you’d 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.
If you’re in a situation that prevents you from repaying the 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.
Don’t Wait To Default To Refinance
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 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 your home loan specialist to see what refinance options could be available for you.
While these are good standards, a licensed Home Loan Expert can help you understand which option might be right for you and your specific situation. Give us a call at (800) 785-4788 to speak to one of our Home Loan Experts.