What is an Acceleration Clause?

What is an acceleration clause?

2 Answers

No place in a mortgage deed or deed of trust will you find the word 'foreclosure'.  The acceleration clause is what addresses a foreclosure action.  Mortgage loans have a note tied to them that outlines the payment schedule and other terms such as the rate, due date of each payment and the maturity date.  The terms of repayment also have what is known as an amortization schedule, or how much of each payment goes to interest and how much to principal [assuming no pre-payments].  When this schedule is not adhered to by the mortgagor, or borrower, the note and mortgage are technically in default.  Even a payment that is a day late creates a default. 

However, lenders typically will not push borrowers for payment until the loan is in arrears by 30 days.  A late charge will be assessed sooner than that.  When an account reaches 90 days in arrears [due for 4 payments], a demand letter for payments to date within 30 days is usually made and nothing less than bringing the loan current is accepted.  If the loan is not brought current by that point in time, the entire balance with interest and other charges becomes due.  This is called acceleration.  If you are driving a car and you push down the accelerator, you reach your destination more quickly.  So it is with the loan.  It reaches its conclusion sooner by having the acceleration clause invoked.

Lenders do not want to own real estate.  So, working with mortgagors to come up with a solution as an alternative is desirable.  But communication from the borrower prior to the loan reaching the foreclosure stage is crucial.  If there is no communication, alternatives such as forebearance or loan modification are usually not available.

Review your mortgage deed or deed of trust.  You will see a ' re-instatement clause' in bold print which gives the mortgagor rights should the acceleration clause be exercised or if it is about to be exercised.

An acceleration clause is a provision in the loan giving the lender the authority to declare the full amount due immediately for violation of a specific loan provision, failure to make payments, or assumption without lender notification would be examples of this.

Other reasons an acceration clause may kick in; failure to pay or cancellation of homeowners insurance, incurrment of tax liens, or not maintaining the integrity of the collateral property. Although a lender can execute for these reasons they are less frequent, which should not be misinterpretted as acceptable infractions.

Acceleration clauses will be in the contract you signed so review the terms.

Take this clause seriously, and avoid giving lenders a reason to execute it.