If you’re having trouble keeping up with your monthly mortgage payments or some other obligation of your mortgage, you may have received a letter telling you that you now owe the entire amount you borrowed within the next 30 days or so because of something called the mortgage acceleration clause.
Don’t panic – often, you can restore your mortgage by developing a plan to catch up with your lender. Here’s what you need to know about your mortgage’s acceleration clause.
What Is An Acceleration Clause In Real Estate?
An acceleration clause in real estate is a provision contained within a mortgage agreement that provides the lender the right to demand immediate repayment of the entire loan balance if the borrower defaults on the loan. This happens when payments are not made in accordance with the terms of the agreement or if other conditions of default are met. The clause indicates that upon default, the entire loan balance including principal and interest is due. This means that the lender can demand repayment of what may be a large amount of money in a short period of time, typically within 30 days.
The acceleration clause helps protect lenders by ensuring they will get their funds back even if the borrower defaults on payments. It also gives them an incentive to work with you if you’re having temporary trouble making payments. The lender might be willing to renegotiate the terms of your loan or provide forbearance instead of accelerating the loan balance.
Are Acceleration Clauses Legal?
Yes, acceleration clauses are legal as long as they comply with all applicable state and federal laws. An acceleration clause is a provision in a loan agreement that allows the lender to immediately demand repayment of the full loan balance if the borrower is late or defaults on payments or other terms of the agreement. It is important for borrowers to understand that this clause exists in their loan agreement and what it means for them.
What Triggers An Acceleration Clause In A Loan Agreement?
There are several things that could trigger an acceleration clause in your loan agreement. Let’s run through them quickly.
Missed Mortgage Payments
Most commonly, lenders exercise the clause when borrowers become delinquent on their payments. As mentioned above, a lender can theoretically call your loan due for just one missed payment, depending on the terms of your mortgage agreement.
However, you usually have to miss two or three mortgage payments before a lender decides to take this step. Moreover, if this is happening, your mortgage servicer is likely to be reaching out to you to see if they can help. The goal is to keep you in your home.
Cancellation Of Homeowners Insurance
our lender will require you to maintain homeowners insurance so that the property can be repaired if it’s damaged to restore its market value. The lender has to be sure the home is salable in case you ever default. Therefore, one of the things that’s usually included in an acceleration clause is a trigger if you cancel homeowners insurance. In practice, the lender is more likely to buy insurance for you and make you pay for it (called “force-placed insurance”), but they have this option.
Nonpayment Of Property Taxes
If you don’t pay property taxes, your local government can place a lien on your property and eventually seize it altogether. Therefore, another option frequently found in acceleration clauses is the chance to accelerate your loan if you miss a payment. As a practical matter, your mortgage lender is more likely to make you go back on an escrow account in order to make sure that your property taxes and homeowners insurance are paid by including them in increments as part of your monthly mortgage payment.
Bankruptcy Filing
If you file for bankruptcy, it may trigger the acceleration clause in your mortgage agreement. That’s because your bankruptcy threatens your lender’s ability to exercise its rights if you default.
The primary mortgage lender holds a superior position to all other creditors on the real estate purchased with the loan and secured with a mortgage. The bankruptcy court’s primacy in determining creditor payouts is a threat to this agreement. That’s why a lender can call in your entire loan should you declare bankruptcy.
Unauthorized Property Transfer
Finally, an acceleration may be triggered if you attempt to transfer the property to another person or an LLC without your lender’s prior permission. Your mortgage contains a due-on-sale clause – also known as an alienation cause – which is violated by any transfer of property, in turn triggering a mortgage acceleration.
What Is A Mortgage Acceleration Letter
If your lender triggers an acceleration clause, you’ll get a letter in the mail. It should include the reason for your mortgage acceleration as well as the lender’s contact information and the mortgage balance with any back interest you owe up to this point, along with a due date for payment.
Typically, the letter will demand payment and specify a date by which the payment is due. If you pay back the full balance owed, your loan will be satisfied, and the lender will send you the updated title without the mortgage lien.
How To Avoid Mortgage Acceleration
The best way to avoid mortgage acceleration is to keep up with your mortgage payments on time and in full. If this isn't possible, discuss your options with your lender before you miss a payment or become delinquent on your loan. It’s important to understand the terms of the acceleration clause and take action quickly if you receive an acceleration notice from your lender.
Options For Borrowers Struggling With An Accelerated Mortgage
Losing your home in foreclosure is pretty unpleasant to think about, both for you and your lender. Because lenders prefer not to own real estate, there are usually a variety of options available for borrowers to choose from to get back to being current on their loan payments.
Refinance
If a borrower is struggling with an accelerated mortgage, refinancing is one of the most viable options to consider. Refinancing involves taking out a new loan that pays off the original loan in full, and typically comes with better terms than the previous loan in order to make it more manageable for the borrower. This can include lower interest rates, a longer repayment term, and more.
Loan Modification
Another option is to pursue a loan modification with the lender. A loan modification involves changes to the terms of your existing loan in order to make it more affordable for you to pay back. This can include reducing your interest rate, extending the payment schedule, increasing or decreasing the principal amount, and more.
Forbearance Agreement
You can also pursue a forbearance agreement with the lender. This is an arrangement wherein the lender agrees to temporarily suspend or reduce your mortgage payments for a set period of time while you get your finances in order. At the end of this period, you’ll have to make
Deed In Lieu Of Foreclosure
A deed in lieu of foreclosure is a way for a borrower to avoid the disastrous effects of the foreclosure process. It is an agreement between the lender and borrower that allows the lender to take back ownership of the property in exchange for cancelling all existing debt obligations. This type of agreement can be beneficial for both parties as it allows the borrower to avoid foreclosure and the lender to get its money back without going through the formal foreclosure process.
Short Sale
Finally, a borrower can pursue a short sale with their lender. A short sale is an agreement between the borrower and lender wherein the borrower sells the property for less than what they owe on it, and in return the debt is considered paid in full. This can be beneficial for both the borrower and lender as it allows the borrower to avoid foreclosure and the lender to get at least some of its money back without going through a formal foreclosure process.
No matter what option you choose, it’s important to speak with your lender about your options before taking any steps. They may be able to offer you some helpful advice or guidance on how to move forward. The key is to act quickly and decisively when dealing with an accelerated mortgage, so that you can avoid foreclosure and get back on track with your loan payments.
What Factors Do Lenders Consider When Deciding Whether To Accelerate?
When deciding whether to accelerate a loan, lenders typically consider several factors. First, they look at the amount of money owed by the borrower and whether they are current on their payments or if they have been delinquent. They also evaluate the borrower's credit score, as this can indicate their ability to repay the loan in full. Additionally, lenders will consider the borrower's employment history, their ability to make timely payments and their overall financial health. Finally, lenders typically look at market conditions in order to determine whether it is feasible for them to foreclose on the property or if they would be better off modifying the loan terms.
It’s important to remember that no two situations are the same and that lenders may weigh these factors differently depending on the situation. It’s also important to speak with your lender as soon as possible if you find yourself in a difficult financial position, so that you can discuss all of your options and determine the best path forward.
Conclusion
Ultimately, dealing with an accelerated mortgage can be a stressful process, but by understanding your options and speaking with your lender, you can make informed decisions that can help you get back on track with your loan payments. Good luck!