As a lender who extends financing to businesses and needs capital, the acceleration clause is here to help you generate capital from your borrowers. However, it’s a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if specific requirements are not complete. Read further to understand more about the acceleration clause in a mortgage and in real estate.
What Is an Acceleration Clause in Real Estate?
An acceleration clause is a contract term that requires the borrower to pay off all the remaining loan amount, in the event that they default on one or some of the payments. The contract performance is “accelerated,” which means that the entire amount becomes due when the agreed-upon circumstances are triggered.
Furthermore, an acceleration clause is a requirement in your mortgage agreement that specifies when and how the lender can “accelerate” the full repayment of the loan. If the borrower fails to fulfill the terms of their mortgage agreement. However, they’ll receive an acceleration letter notifying them that the lender has activated the acceleration clause in real estate. It also, allows the lender to require payment before the standard terms of the loan expire.
Acceleration Clause in a Mortgage
A mortgage allows a future property buyer the funds needed to purchase a piece of property. In exchange, that buyer gives the bank an interest in the property that is being purchased. If the purchaser fails to pay back the money that was loaned to them, the bank will have the interest necessary to foreclose on the loan and sell the property in order to pay off the loan. However, an acceleration clause in a mortgage allows the current loan holder to demand repayment in full if the borrower defaults on the loan. After the acceleration of the loan, the borrower will no longer pay off the loan in installments. Thus, the loan changes from an installment agreement to a debt that’s due.
In addition acceleration clauses in a mortgage help to mitigate the risk of the default mortgage lender. They are usually based on payment failures but they can be structured for other incidents as well. In most cases, an acceleration clause expects the borrower to instantly pay the full balance owed on the loan if terms have been breached. With full payment of the loan, the borrower is relieved of any further interest payments.
Acceleration clauses are most common in mortgage loans. However, it helps to protect the lender from the risk of borrower default. A lender may choose to include an acceleration clause to mitigate possible failures and have control over the real estate. With an acceleration clause, a lender can foreclose the property and take ownership of the home. This may be advantageous to the lender if the borrower default and the lender gets the loan through a resale.
How Does the Acceleration Clause Work?
Normally the lender can call or summon the acceleration clause In real estate if the borrower misses one monthly payment. Some mortgage lenders allow you to miss two or three before the acceleration clause. However, it depends on your contract and state laws. If you’re unable to repay your loan by a set date, usually 30 days after receiving an acceleration letter, your lender might begin the foreclosure process.
What Triggers Acceleration Clauses in Real Estate
The following circumstances can trigger acceleration clauses.
#1. Failure to Meet Income Fees
Failure to meet income fee requirements can result in an acceleration clause. Income fees are determined by the interest rate that a lender charges a borrower. However, interest payments are required every month. There is also a limited number of missed fees before which the clause is triggered.
#2. Failure to Meet Mortgage Fees
Principal loan amounts are normally large, However, repayment takes place through income fees and mortgage fees over a fixed period. Failure to meet the partial mortgage fees may result in the activation of an acceleration clause in your real estate.
#3. Breaking of Debt Agreements
The agreements usually limit the actions of the borrower and reduce the risk that the lender faces by setting specific rules within which the borrower must act. However, if the borrower breaches the regulations, the lender can trigger an accelerated clause and request full repayment.
You must inform your mortgage lender if you plan on selling or transferring your property to another person.
#5. Failure to Pay Property Taxes
Failing to pay property taxes allows the government to place a legal claim on your home, it is usually in the acceleration clause.
#6. Canceled Homeowners Insurance
It is very important for a lender to protect his or her collateral. However, they do that, by requiring that you have homeowners insurance on the property for the loan term. If you cancel your homeowner’s insurance at any time during your loan term, the lender has the right to enforce an acceleration clause.
When any of the above events take place, your lender will send you an acceleration letter with a due date. However, you will need to pay the remaining of your loan in full. If not, your lender can choose to move forward with foreclosure.
What Happens After the Acceleration Clause Is Invoked?
If your lender activates an acceleration clause, you’ll receive a letter that includes:
- Information about how to contact your lender.
- Your outstanding loan balance.
- The explanation for the mortgage acceleration.
- Notice that it requires you to pay the full amount back in 30 days.
Therefore, if you don’t pay the full amount back in 30 days, the lender will begin the foreclosure process. But if you pay back your outstanding loan amount, your loan balance will be complete and you’ll get the title to your real estate from your lender. A lender must protect its investment and it has the right to foreclose if a borrower fails to make their loan payments on an outstanding loan.
Considerations Before Enforcing an Acceleration Clause in Real Estate
A lender needs to consider the following factors:
#1. Income Payable
In the case of the mortgage acceleration clause, the borrower is only responsible to pay the interest owed up to that point along with the outstanding principal balance of the mortgage. In such a case, the borrower doesn’t need to pay the future interest payments.
#2. Risk
Typically, a borrower misses payments when he or she doesn’t have money. So, there is a high probability that if you trigger the acceleration clause the borrower won’t be able to make the full payment within a short time frame. However, inflicting significant losses on the lender.
#3. Prepayment Penalty
If the lender triggers the acceleration clause, which means that the borrower didn’t initiate the prepayment. In such a case, the borrower doesn’t need to pay any prepayment penalty usually associated with paying off a loan before tenure.
Advantages and Disadvantages of the Acceleration Clause
Consider the following advantage and disadvantages of the acceleration clause.
Advantages of Acceleration Clause
Some of the major advantages of an acceleration clause are as follows:
- First, it clearly defines the condition under which the loan verifies to be bad debt and makes monitoring easy for the lender.
- It helps a lender recover bad debts, which is a common event in the lending business. In this way, it significantly reduces the risk of losing out on the lent money.
- the borrower will be rid of the future interest payments once the full payment as per the clause is made
Disadvantages of Acceleration Clause
Some of the major disadvantages of an acceleration clause are as follows:
- From the perspective of borrowers, it is an unfavorable clause as it compels them to pay a large sum of money at very short notice.
- The terms and conditions captured in an acceleration clause can be overwhelming to understand for a layman.
- It usually results in the borrower losing the mortgaged property.
- The borrower loses the initial payment on the property.
Notification of Acceleration Clause
Breaking a letter sent typically has to specify the following:
- The bankruptcy
- The action required to cure the bankruptcy
- That failure to cure the default on or before the date specified in the notice could result in the acceleration of the debt and sale of the property.
Normally, the servicer will send this letter when the borrower is around 90 days contrary to payments. That’s because, under federal law, in most cases, a foreclosure can’t start until the borrower is more than 120 days contrary to the loan. If you don’t cure the bankruptcy, the foreclosure will start.
The notice below also repeatedly informs the borrower about the right to reinstate the loan after acceleration and the right to assert the non-existence of a default or raise a defense in a foreclosure proceeding.
Right to Reinstate the Loan After Acceleration
In most cases, in state law, the borrower can reinstate the loan after acceleration to stop the foreclosure.
Some states, for example, have a law allowing a late borrower to reinstate the loan by a specific deadline. On the last business day before the sale date, If state law doesn’t specifically provide a right to reinstate, many mortgages and deeds of trust that contain written language giving borrowers a specific deadline for getting current on the loan. Check your loan documents for a paragraph called “Borrower’s Right to Reinstate After Acceleration” or something similar. Often, the contract allows the borrower to reinstate at any time prior to the earliest of five days before the sale of the property pursuant to any power of sale contained in the contract (applicable to a nonjudicial foreclosure) or entry of a judgment enforcing the contract (applicable in a judicial foreclosure).
Also, even if the loan contract doesn’t mention anything about reinstatement, the lender might, after considering the situation, let you reinstate.
But you might not get the right to complete a reinstatement if the lender accelerated the loan because you sold or transferred the property without permission. Check the mortgage or deed of trust that you signed when you took out the loan to get detailed information about your right, if any, to reinstate the loan.
How to Reinstate the Loan After Acceleration
To reinstate, you’ll have to pay the lender all of the overdue amounts as if no acceleration had occurred, cure any other kind of default, and pay all expenses that the lender incurred in enforcing the contract, like:
- Reasonable attorneys’ fees.
- Property inspection and valuation fees.
- Fees incur to protect the lender’s interest in the property.
The lender might require you to make a reinstatement payment with a money order, like a bank check, or cashier’s check. After you reinstate, the mortgage, and your obligations under it, remain fully effective as if no acceleration had occurred.
Foreclosure Procedures
Foreclosure procedures depend on state law and the circumstances. Once the loan is rev and not take other steps to stop the process, the lender will either:
- File a lawsuit in court to foreclose (a judicial foreclosure), or
- Follow specific out-of-court procedures, set out in the state statutes, to complete a nonjudicial foreclosure.
After the lender fulfills all of the legal requirements for foreclosure, he can sell it to a new owner at a public sale. Often the foreclosing lender. With judicial foreclosures, a sheriff’s sale is customarily in use as this last step in the foreclosure process. In non-judicial foreclosures, trustees’ sales are common. The successful bidder at the auction becomes the new owner of the property. However, the proceeds go toward paying off the loan.
When can a lender accelerate the date?
There’s a good chance your mortgage deal has an acceleration provision if you have one. In essence, it means that your lender has the right to request “expedited” payment if you violate any loan terms. In other words, the entire sum is due now rather than over the course of 15 or 30 years as originally intended.
How does the acceleration clause work?
A loan agreement’s “accelerated provision” specifies circumstances under which the borrower must repay the loan in full right away. When the borrower materially violates the terms of the loan arrangement, an accelerated clause is often triggered.
What are the 3 ways of acceleration?
The three main types of accelerated motions are uniform acceleration, non-uniform acceleration, and average acceleration. The motion in which an item moves in a straight line while increasing in velocity at regular intervals is referred to as uniform acceleration.
What happens after notice of acceleration?
The majority of mortgage contracts include an acceleration provision, which allows your lender to demand full payment of your debt in order to avoid foreclosure if you break your obligation by skipping payments.
How long is an acceleration clause?
While each lender sets their own deadlines for this kind of mortgage acceleration, most hold off on sending the notice for 90 days after the first missed payment.
What is the best example of acceleration?
An object has positive acceleration if it is accelerating and traveling in the right direction. Positive acceleration was demonstrated in the first example by the speeding car. The acceleration is occurring in the same direction as the car’s motion, which is forward and speeding up.
Acceleration Clause FAQs
What does an acceleration clause do for the seller?
An acceleration clause is a requirement in a contract that allows a lender to “accelerate” the repayment of your loan if certain conditions aren’t met.
What is a notice to accelerate?
An acceleration notice tells you that you must pay off your whole mortgage loan right away. It says you must also pay all the income and fees.
How do you write an acceleration clause?
If any payment is missed, at the option of the Lender, without notice, the entire balance shall become due and payable immediately. The lender may pursue all available legal remedies in connection with this unpaid rent.
Related Articles
- FORECLOSURE ATTORNEY: Overview and Fees (Updated!)
- FORECLOSURE LISTINGS: How to find Free Foreclosure listings stress-free
- Escalation Clause in Real Estate: Practical Examples (+Quick Tips)
- ESCALATION CLAUSE REAL ESTATE: Why And When You Should Use It
- HOUSE FORECLOSURE Explained!!! (+ Detailed guide to buying Foreclosed homes
