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An acceleration clause is a common section of a mortgage contract. Though little-noticed, it can have big consequences: Namely, it can require you to pay off your entire mortgage at once. Even if you miss only one payment.
The good news is that your lender can’t activate the clause on a whim, and it may not be the end of the world even if they do. Still, it’s key to understand how acceleration clauses work, and what triggers them.
What is an acceleration clause?
Acceleration clauses are a common, but often overlooked, feature of mortgages. Most loans will have one, which is why you should always read the fine print of your mortgage — or any loan document — before signing it.
The acceleration clause, true to its name, accelerates the mortgage repayment schedule. It will force you to repay the entire balance of your loan, plus accrued interest, in a single payment, if conditions are met. These conditions are specific actions (or inactions) on the borrower’s — that is, your — part.
For example, missing a certain number of mortgage payments or canceling your homeowners insurance could trigger the acceleration clause.
Now, 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’d own the home free and clear, and the lender no longer has a lien attached to your home. But 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.
What triggers the acceleration clause?
Acceleration clauses can be written differently, but there are a few common contingencies they usually delineate:
- 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 can invoke the clause, letting the lender demand full repayment.
- Cancelation of homeowners insurance – Stopping your homeowners insurance policy, letting it lapse, or failing to maintain sufficient coverage can all be grounds.
- Unauthorized title 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 – Getting in arrears or disregarding property taxes allows the state or municipality to place a lien on your home. Lenders don’t like that, since they’d come in second at repayment time if the house were seized and sold.
- Bankruptcy – Filing for bankruptcy can trigger the acceleration clause, as it makes the lender nervous about your ability to make your monthly payments.
If one of these events happens, your lender will send you an acceleration letter, invoking the clause and setting a due date to settle the mortgage. 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.
How to avoid acceleration
The obvious way to avoid the acceleration clause is simple: Don’t give your lender grounds to invoke it. Make your required mortgage payments on time and in full, and follow the other terms of your loan.
Of course, stuff happens in life. So the second best way to avoid acceleration is: Head it off at the pass. If you know you’re going to run into issues with making payments or have another problem that could trigger the clause, reach out to your lender as soon as possible. Explain your situation and try to work together to find a solution. Odds are, they’ve had clients with similar problems before.
The point is not to try to hide or hope the lender won’t notice your transgression (because, sooner or later, they always do). And once the whole invoke-the-acceleration-clause process gets started, it will be harder to stop it.
Options after a mortgage acceleration
Even if you do trigger the clause and receive the acceleration letter, it 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 until your situation improves or 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, the new loan rate 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 foreclosure stamped 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.
Frequently asked questions about acceleration
An acceleration letter is a document that your lender will send to you if an acceleration clause in your mortgage is triggered. It will outline what triggered the acceleration clause and include details on the amount you must pay and the deadline for making payment. Typically, the deadline is 30 days from the date of the letter.
Lenders decide to accelerate a loan based on the contingencies specifically listed in the mortgage documents. Usually, the things that can trigger an acceleration clause relate to the lender’s risk in recouping its outlay. Things that increase that risk, such as the home becoming uninsured or the borrower missing payments, are typical triggers for acceleration.
Bottom line on acceleration clauses
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.
Additional reporting by T. J. Porter