Acceleration Clause: The Triggers, Examples, and Mortgage Reinstallment

What exactly is an acceleration clause, and where does it come from? What should you look out for when drafting these clauses into contracts?

An acceleration clause (sometimes called an escape clause) is inserted at the end of a contract to provide protection against unforeseen events.

In other words, this type of clause permits the lender to request a full repayment of the debt, in case the borrower does something against the loan contract. The acceleration clause actually specifies exact conditions that could trigger the lender to ask for accelerated payment.

An acceleration clause may also include early termination fees, penalties, or liquidated damages. It protects the lender in case a borrower defaults on a loan or their credit score drops significantly.

Let's go though everything you need to know about the acceleration clauses.

What Is an Acceleration Clause?

Acceleration clause gives the lender the power to immediately foreclose on your property if you fail to make payments. This clause is usually included in mortgages because it gives the bank the ability to recoup some of its losses, if you default on your loan.

An acceleration clause does not mean that the bank wants to take over your home. Rather, it simply gives the bank the option to do so if necessary.

When a homeowner breaches the contract, it becomes a liability for the lender. Additionally, banks might use that breach to foreclose a property and make a sale in a better market.

When a borrower pays the requested amount, they get a legal title of the property and are no more in debt to the lender.

Due On-Sale Clause

Similarly, a due on-sale clause lets the lender force you to pay off the entire balance of your mortgage if you sell your home without informing the lender beforehand.

If you don't inform the lender about your sale, they can still sue you for breach of contract. However, the lender cannot claim damages unless you actually sell your home, so there are ways around this.

For example, you could give notice that you're selling the home, but tell the buyer not to close escrow until the end of the month.

Then, once the buyer closes escrow, you notify the lender that the deal fell through. Your lender cannot use an acceleration or due on-sale clause against you if you move out of your home and transfer ownership to another person. In fact, most states prohibit banks from doing so.

Triggers for Accelerated Payments

Too many unpaid mortgage installments will most likely trigger acceleration, but sometimes even one monthly payment can do it. Lenders can include a minimum your credit score can reach before they request accelerated payment.

Some states require lenders to give homeowners a certain amount of time before accelerating a loan. In Arizona, for instance, borrowers must receive 30 days' written notice.

If you decide to sue the bank, you'll want to file your case within 90 days of receiving notice of default. In many cases, courts will look at whether the borrower had enough time to catch up on missed payments.

For example, if the borrower misses one payment and sends a letter saying he wants to stop working with the lender, the court might find that the borrower didn't have enough time to catch up.

In this article, we'll help you get familiar with various acceleration triggers to look out from.

Not Paying Homeowners Insurance

If you are buying a home, you probably already know that you need to purchase homeowner’s insurance. But what happens if you want to cancel it?

If insurance installments are listed as a contingency for accelerated payments, the lender can start the process of requesting balloon payment as soon as you cancel it.

This is because canceling the insurance might signal to the lender that you are selling the property. When you no longer own the home, you no longer need to carry homeowner’s insurance.

Not Paying Property Taxes

Your home will be seized if it fails to meet the state’s property taxes. This is because the state has the authority to sell the land itself and use the money to fund public projects.

Escrow accounts are often included as part of a mortgage agreement. These accounts hold funds that are used to make regular payments to lenders. When a payment isn’t received, the lender usually sends the account holder a letter letting him know about the missing payment.

Failure to respond could result in foreclosure proceedings being initiated against you. A missed payment could lead to a lien being placed on your property. This puts the bank in charge of making sure that the property owner pays his bills.

You might think that paying the bill would prevent the lien from being put on your property, but it doesn’t work that way. Once a lien is filed, it stays on record indefinitely unless you successfully challenge it.

Filing for Bankruptcy

A bankruptcy filing typically causes lenders to accelerate mortgages. This means that payments are due immediately, even though it's possible to negotiate a repayment plan.

If you miss one payment, the lender could turn off the power, cut off water and gas, or take possession of your property. Your credit score could suffer, too.

Lenders usually want to avoid foreclosing on borrowers because it costs money and takes time. They're likely to offer you some sort of loan modification or other concession. But if you don't make those payments, the lender might decide to foreclose anyway.

Title Ownership Changes

The law states that a lender must provide written notice of default within three days of discovering that the borrower transferred the property without the lender’s consent.

If the lender fails to do so, it cannot enforce the terms of the promissory note against the subsequent owner.

However, if the borrower sells the property to another person, the lender must notify the buyer about the unpaid balance. This is because the original borrower still owes the money even if he no longer owns the property.

If you are considering selling your home, make sure to check out our article on how to sell your house fast.

Is It Possible to Undo Acceleration: Mortgage Reinstatement

A mortgage reinstatement allows borrowers who owe money on a home loan to continue making payments without having to sell the property. This process is called mortgage reinstatement because it brings the borrower back into compliance with their original terms.

While the accelerated clause obligates the borrower to pay off the loan in its entirety, mortgage reinstatement allows them to pay off the amount they missed paying and brings them back to regular monthly payments.

There are two main ways to obtain a mortgage reinstatement: 1. Loan modification and 2. Alternative repayment plan. Both options allow borrowers to keep living in their homes while avoiding foreclosure. However, there are different costs associated with each option.

In Need of Selling a House?

If, upon checking your mortgage contract, you conclude that it has an acceleration clause, and you are in an unenviable financial situation - it might be best to notify your lender and sell a property before you get foreclosed.

What is inconvenient about urgent sales is the fact that you usually don't get top dollar for your home.

SleeveUp Homes actually creates a safe environment, even for short sales. We will buy your house as-is, in no time, and for $10 grand more than what others offer.

But don't take our word for it, request an offer and see it for yourself. Contact SleeveUp Homes if you are selling a house in California.

Author:

Cesar Gomez , Broker /

Cesar has worked as a real estate agent and broker in the southern California region since 2013.

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