Acceleration Clause Definition | The bank rate
Almost all home loans contain an acceleration clause. It is important to understand this clause and how it is triggered. Here are the basics to know.
What is an acceleration clause?
An acceleration clause requires you to pay your outstanding mortgage balance – the amount remaining on your home loan – in full. You will also be responsible for paying any interest accrued since your last payment.
Acceleration clauses, also known as mortgage acceleration, are a standard feature of mortgages. They are designed to protect the mortgage lender against default. Certain conditions can trigger the acceleration clause, such as missing a payment or voiding home insurance.
How does the acceleration clause work?
The acceleration clause can be invoked after missing a monthly mortgage payment. Some mortgage lenders allow you to miss two or three before this happens, but it depends on your contract and state laws.
If you are unable to repay your loan by a specified date, usually 30 days after receiving an acceleration letter, your lender can begin the foreclosure process. If you are able to repay the outstanding balance, the outcome would be similar to paying off your mortgage based on the original term of the loan: you own the home upfront and clear, and the lender no longer has a lien attached to your home .
What triggers the acceleration clause?
Accelerate clauses can be written differently, but there are a few common triggers:
- Missed mortgage payments – It usually takes two or three missed payments for an acceleration clause to take effect, but review your contract. Sometimes a single missed payment is the cause for a full refund.
- Termination of home insurance – If you cancel your home insurance or if you do not maintain sufficient cover, this could trigger the acceleration clause of your contract.
- Unauthorized transfer – Your mortgage lender must be informed if you plan to sell or transfer your property to another person or business.
- Non-payment of property taxes – Because not paying property taxes allows the government to place a lien on your home, it is often included in the acceleration clause.
- Bankruptcy – Filing for bankruptcy can trigger the acceleration clause to ensure your lender is able to recoup its losses.
If any of these events occur, your lender will send you an acceleration letter with a due date. You will either have to negotiate with your lender or pay off the rest of your loan in full. Otherwise, your lender may choose to go ahead with the foreclosure.
Options after a mortgage acceleration
Receiving the Acceleration Letter is not the end – you will still be able to negotiate and work with your mortgage lender towards potential solutions, such as:
Forbearance temporarily suspends your mortgage payments when you experience financial difficulties. This can help you stay afloat during setbacks, and since these payments are always reported as punctual to the credit bureaus, your credit should remain intact should you ever need to refinance.
With forbearance, however, you can usually only suspend a limited number of payments. You’ll also have to pay interest on the months you missed, which will make your mortgage more expensive in the long run. To find out if you qualify for forbearance, contact your lender as soon as possible.
Since the foreclosure process can be time-consuming and costly for your lender, they might be willing to change the terms of your loan instead, such as changing your interest rate or extending your term to make payments easier. Unlike forbearance, loan modifications are permanent, so this strategy is best if you expect to experience ongoing difficulties and need a major change to the terms of your mortgage.
To get a change, you will likely need to submit financial documents and a letter to your lender explaining your situation.
Refinancing lets you borrow a new home loan on different terms that can make your payments more affordable – you’ll simply use the new loan to pay off your old mortgage. This might be a good option if you have equity in your property, but it might not be the right choice if you’ve already missed payments. This is because you are unlikely to be approved without good credit, and even if you are, it might not be enough to significantly reduce your monthly payments.
If you can find a buyer, your lender may agree to a short sale. A short sale lets you pay off your mortgage for less than it’s worth. This isn’t a route lenders like to take, though – they’ll usually only approve a short sale if your home’s value has gone down and you owe more than the property is worth.
Foreclosure is a last resort, but sometimes it is unavoidable. Your lender might be willing to accept a deed in lieu of foreclosure or repayment, which will prevent you from having a foreclosure on your credit report, but you will still be responsible for any difference between the value of your property and the balance of the mortgage.
The pre-foreclosure, auction, and eviction process varies depending on state laws, and you may still be able to get your home back before the foreclosure sale. It’s also usually a slow process, so you have time to negotiate with your lender or find other solutions.
At the end of the line
Acceleration clauses are standard practice and for the most part will not interfere with your mortgage. If the worst happens, you may be able to work out a solution with your mortgage lender to avoid paying the rest of your home loan all at once. Be aware of potential triggers, monitor payments – or request forbearance if necessary – and stay in communication with your lender.