Almost every home loan contains an acceleration clause. It’s important to understand this clause and how it’s 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 left on your home loan — in full. You’ll also be responsible for paying any accumulated interest since your last payment.
Acceleration clauses, also called 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, like missing a payment or canceling homeowners insurance.
How does the acceleration clause work?
The acceleration clause can be invoked after you miss one 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’re unable to repay your loan by a set date, usually 30 days after receiving an acceleration letter, your lender might begin the foreclosure process. If you are able to pay off the outstanding balance, the outcome would be similar to paying off your mortgage according to the initial loan term: You own the home free and clear, and the lender no longer has a lien attached to your home.
What triggers the acceleration clause?
Acceleration clauses can be written differently, but there are a few common triggers:
- Missed mortgage payments – It typically takes two or three missed payments for an acceleration clause to come into effect, but review your contract. Sometimes a single missed payment is cause for full repayment.
- Cancelation of homeowners insurance – If you cancel your homeowners insurance or fail to maintain sufficient coverage, this could trigger the acceleration clause in your contract.
- Unauthorized transfer – Your mortgage lender must be informed if you plan on selling or transferring your property to another person or business.
- Failure to pay property taxes – Because failing to pay 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 one of these events happens, your lender will send you an acceleration letter with a due date. You’ll either need to negotiate with your lender or pay the remainder of your loan in full. If not, your lender can choose to move forward with foreclosure.
Options after a mortgage acceleration
Receiving the acceleration letter isn’t the end — you’ll still be able to negotiate and work with your mortgage lender toward potential solutions, such as:
Forbearance temporarily pauses your mortgage payments when you’re struggling financially. This can help you stay afloat during setbacks, and since those payments are still reported as on-time to the credit bureaus, your credit should stay intact should you need to refinance later on.
With forbearance, however, you can generally suspend only a limited number of payments. You’ll also still owe interest on the months you missed, which will make your mortgage more expensive in the long run. To see if you qualify for forbearance, contact your lender as early on as you can.
Because the foreclosure process can be long and expensive for your lender, it might be willing to modify the terms of your loan instead, such as change your interest rate or extend your term to help make payments more manageable. Unlike forbearance, loan modifications are permanent, so this strategy is best if you expect to experience ongoing hardship and need a major change to the terms of your mortgage.
To obtain a modification, you’ll likely need to submit financial documentation and a letter to your lender explaining your situation.
Refinancing allows you to borrow a new home loan at different terms that can make your payments more affordable — you’ll simply use the new loan to pay off your old mortgage. This can 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. That’s because you’re unlikely to be approved without good credit, and even if you are, it might not be enough to meaningfully lower your monthly payments.
If you’re able to find a buyer, your lender might agree to a short sale. A short sale allows you to pay off your mortgage for less than it’s worth. This isn’t a route lenders like to take, however — they’ll typically only approve a short sale if your home’s value has declined and you owe more on it than the property is worth.
Foreclosure is a last resort, but it’s sometimes unavoidable. Your lender might be willing to accept a deed-in-lieu of foreclosure or repayment, which will keep you from having a foreclosure on your credit report, but you’ll still be responsible for any difference between your property’s value and the mortgage balance.
The preforeclosure, auction and eviction process vary based on state laws, and you might still be able to reclaim your home before the foreclosure sale. It is also usually a slow process, so there is time to negotiate with your lender or find other solutions.
Acceleration clauses are common practice, and for the most part, they won’t interfere with your mortgage. If the worst does happen, you might be able to work something out with your mortgage lender to avoid paying the remainder of your home loan all at once. Be aware of the potential triggers, keep on top of payments — or request forbearance if needed — and stay in communication with your lender.