What is an acceleration clause? If you have a mortgage, odds are your contract includes an acceleration clause. It basically means that if you break any terms of your loan, your lender can demand “accelerated” payment. In other words, rather than paying that money back over 15 or 30 years as planned, the whole amount is due immediately.
Sound stressful? Here’s what home buyers and owners should know about a mortgage acceleration clause, including what triggers it and how to keep this scary scenario from happening.
What is an acceleration clause?
An acceleration clause is a part of the standard mortgage agreement used by Fannie Mae, a contract used in 80% to 90% of residential mortgages, explains Adam Sherwin of the Sherwin Law Firm, in Somerville, MA. And even if your mortgage is not backed by Fannie Mae, most lenders have some form of an acceleration clause in place.
If you adhere to your mortgage contract by paying your monthly bill on time and otherwise, you will avoid ever triggering this acceleration clause. But if you violate any of your contract’s terms, watch out.
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“If any terms of the loan agreement are not met, the mortgage note holder has the right to call the note,” explains Ralph DiBugnara, a vice president at Residential Home Funding.
Translation: It’s time to pay up!
What can trigger an acceleration clause?
The most common reason lenders accelerate a mortgage is because a borrower has failed to make monthly mortgage payments. But most mortgages also allow acceleration if another part of the contract is breached. Other common covenants that could trigger acceleration include the following:
- Not having home insurance—or not keeping it current
- Not paying property taxes, or paying them late
- Failing to keep the home in livable condition
- Attempting to transfer the property without approval from the lender
Each mortgage contract is different, so make sure to read yours carefully to know what could trigger your acceleration clause.
The mortgage acceleration process
Generally a letter will arrive informing a borrower that the lender has triggered the acceleration clause. The letter will give the amount due, consisting of the balance of the loan, plus interest on any missed payments. This letter will also include the date by which you must pay up. Typically, that will be within 30 days of receiving the letter.
If you can’t pay, the lender will proceed to the next step: foreclosure, where the lender assumes ownership of your home in an attempt to recoup its costs.
A lender doesn’t have to accelerate your loan to foreclose on your home, explains Sherwin, but often it will. “It’s kind of a formality,” he explains. “It’s one last chance to pay before the foreclosure process begins.”
What can you do if your mortgage is accelerated?
“It’s important to note that even if your mortgage is accelerated, you can still avoid foreclosure,” says Sherwin. “It doesn’t mean that there’s no other option left.”
Usually, you can work with your lender to fix the problem and have your mortgage reinstated. That could mean paying the missed payments (with interest) or fixing whatever caused the lender to call the loan. Sometimes, your lender will also restructure your loan, called loan modification, making your payments smaller so that you can afford them.
“Each servicer has their own specific guidelines for modification,” says Sherwin, but they may extend your loan’s terms, reduce your interest rate, or come up with a delayed repayment schedule that works for both parties.