Reading over a mortgage loan can feel like reading the licensing agreement for a piece of software. Just like most people skip the licensing agreement and click “I agree,” most people sign their mortgage loan without reading all of the fine print. We trust that our agent or lawyer has properly explained the terms, and we sign on the bottom line.
Normally, this isn’t a problem – until that fine print starts to have a real-world impact. Today, we’re going to discuss one of the most ubiquitous mortgage clauses: the acceleration clause. Here’s everything you need to know.
What Is An Acceleration Clause?
An acceleration clause is a part of the mortgage document that allows the lender to demand immediate repayment of the loan amount under certain conditions. If a homeowner fails to meet the conditions outlined in the clause, the lender will send them a letter saying that the acceleration clause has been triggered. This letter will demand full repayment of the loan, including all interest, within a certain period of time.
Acceleration clauses exist to reduce the risk for lenders. By keeping lenders’ risks as low as possible, mortgage rates stay low, and more people are able to afford homes. Most acceleration clauses are triggered when the homeowner becomes delinquent on their payments, but there can be other reasons the clause may be triggered. For example, the acceleration clause is routinely invoked when you sell a house that hasn’t been paid off. You have to pay off the balance before you can actually sell the house, which is something that will typically happen at closing.
In the event of delinquencies, different contracts will be more or less lenient. Some mortgage documents allow for two or even three missed payments before the acceleration clause can be triggered. In other cases, the clause may be triggered by a single missed payment.
For example, someone has a 30-year mortgage, but they miss two consecutive payments in year 10. At that point, the lender sends a letter stating that the acceleration clause has been triggered, and that the remaining balance is due in full. The homeowner would then have two choices. If they’re able to pay, they can pay off the loan, at which point they’ll receive the deed. They’ll actually save money on interest, because the loan term has been shortened. If the borrower can’t pay, the lender will then have the right to initiate the foreclosure process.
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Are Acceleration Clauses Legal?
Receiving a mortgage acceleration letter can be a shock. At first, you might even be wondering if it’s legal. Surely the bank can’t just demand payment like that, right?
In fact, an acceleration clause is entirely legal because the alternative would simply be unworkable. Without accelerating the loan, a lender would have to sue a borrower for every missed monthly payment. Imagine how clogged the legal system would be if every missed payment turned into a lawsuit!
That said, certain states have their own restrictions and requirements for acceleration clauses. Even if your bank has triggered the clause, it’s worth consulting with a lawyer to ensure that the terms of the clause are legal.
What Can Trigger An Acceleration Clause?
We briefly mentioned that missed payments aren’t the bank’s only reason to trigger an acceleration clause. So, what are some of the other reasons? Let’s take a look.
Homeowners Insurance Cancellation
Your mortgage document will require you to maintain homeowners insurance for the life of the loan. This is to protect the lender from any permanent damage to the property. Suppose, for example, that the house were to burn down, and you defaulted after the fact. If you didn’t have homeowners insurance, the bank would only be able to repossess a burned-out husk.
In most cases, the lender will simply obtain insurance on your behalf and add it to your mortgage bill. This is called “force-paced insurance.” But the lender will also have the option to invoke the acceleration clause.
Not Paying Property Taxes
If you stop paying property taxes, your local government can place a tax lien on your house. If you keep not paying, they may eventually seize the property. To protect lenders, the acceleration clause often gives them the option to invoke the clause if property taxes are unpaid.
In practice, this is most often handled via an escrow account, which is established when you first sign your mortgage. The escrow account can be used to pay delinquent taxes, remove a government lien, and keep your loan in good standing. It’s important to understand the exact terms of your loan and stay up to date on your taxes.
Filing for bankruptcy could automatically trigger your mortgage’s acceleration clause. This happens because bankruptcy could make it impossible for lenders to collect the money after a default. By triggering the clause, the bank has a better chance of getting their money back.
Unauthorized Property Transfer
If you try to sell your house without involving your lender, the acceleration clause will automatically be triggered. This is because you’re not allowed to sell the house without paying off the balance in full. Under normal circumstances, this would be handled at closing. The buyer’s payment goes first to pay off your remaining mortgage balance, and you get whatever is left over.
Home Becomes “Unlivable”
The last common thing that could trigger an acceleration clause is if the house is no longer considered livable. As a homeowner with a mortgage, you’re required to maintain your plumbing, electrical, roofing, and other essential parts of the home. If the house is no longer livable, it loses a significant amount of value, and the bank will want to limit its losses by demanding full payment.
What Is A Mortgage Acceleration Letter?
A mortgage acceleration letter is an official letter from the bank notifying you that the acceleration clause has been triggered. The letter will include the reason your mortgage was accelerated, along with the outstanding balance, interest, the lender’s contact information, and a due date for the final payment.
If you’re able to make the payment, you can simply send in full payment, and you’ll receive a clean title in the mail. If you’re not, there may still be hope. You’ll have to try and work out a payment agreement, or see if you can resolve problems like unpaid property taxes.
What Factors Do Lenders Consider For Mortgage Acceleration?
Before a lender decides to proceed with a mortgage acceleration, they need to consider a couple of factors: risk, and interest payable. Here’s a quick look at both:
Risk: The main reason for a lender to trigger an acceleration is to make sure they get their money back. But this isn’t as straightforward as it seems. If you didn’t have money for your monthly payment, it’s unlikely you’ll come up with your entire outstanding balance within 30 days. In other words, the bank knows that foreclosure is a likely outcome. Since foreclosure is painful for lenders as well as homeowners, they may try to work out a payment plan.
Interest payable: Even if the borrower manages to come up with the entire outstanding balance, it could be a bad deal for the lender. Remember, lenders only make money when you pay interest. When you pay off the loan all at once, the lender loses out on years’ worth of future interest payments. It can make more sense for them to agree to forbearance or a payment plan.
What Happens When The Terms Of The Loan Are Satisfied?
Thankfully, most people are able to avoid having their house foreclosed by working out a repayment plan or negotiating a loan modification. Ultimately, the bank just wants to get paid, and as long as they’re convinced they’re getting their money, they won’t want to go through the trouble of acceleration. Just keep in mind that when you work out an agreement, you’ll probably have to pay at least some of the expenses your bank incurred in triggering the acceleration.
What Are My Options If I Can’t Pay What I Owe?
Unfortunately, you may not be able to satisfy the terms of your loan. But that doesn’t mean you have no options. Lenders don’t like owning real estate because it’s a pain to deal with. After all, they’re in the money business, not the real estate business! Lenders also don’t like lawsuits, which can be expensive for all parties. As a result, you may still be able to avoid foreclosure.
If you have enough equity in your home, your lender may allow you to refinance the property. One way is to do what’s called a “rate and term refinance.” This refinancing option converts a short-term loan with a long-term loan, which lowers your monthly payments. As long as you can afford the new payments, your bank should approve this option.
The other refinancing option is called a “cash-out refinance.” With this option, you receive cash in exchange for some of your existing equity. This cash could then be used to make your monthly payments.
Loan forbearance is a program where your lender temporarily pauses your monthly payments. You’ll still owe money, and interest will continue to accrue, but you can get some breathing space to recover your finances. If you’re not able to pay your mortgage, your best bet is to contact your lender immediately and ask about forbearance. Additional forbearance programs are still available in many states to help people who have fallen behind due to Covid-related income loss.
Deed In Lieu Of Foreclosure
If there’s absolutely no way you can pay off the balance, even with a plan or a refinance, you’re unfortunately out of options for keeping your home. But that doesn’t mean you have to accept a foreclosure, and the accompanying hit to your credit record.
Remember, lenders don’t like lawsuits! Unless there are unusual circumstances, most lenders will agree to what’s called a “deed in lieu of foreclosure.” In this procedure, you voluntarily sign over control of the house to your lender, without going through a lawsuit. This keeps things simple for the bank, and prevents any further damage to your credit.
What’s The Difference Between Alienation & Acceleration Clauses?
An alienation clause and an acceleration clause are similar, in that the bank requires you to repay your outstanding mortgage balance in full. However, alienation clauses are triggered when you sell your home. It’s what allows the bank to recover the balance at closing, when the deal is transacted.
An acceleration clause helps mortgage lenders ensure that they obtain repayment in a timely manner. Of course, it can be scary to be on the other end of the transaction. But by understanding your rights and obligations, you’ll be able to resolve the situation. We hope this guide serves as a helpful starting point.
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