An acceleration clause allows a mortgage lender to demand full repayment of the loan if certain conditions are not met. This clause protects against missed payments, violations of loan terms, or significant changes in the borrower’s financial situation. If triggered, the borrower must pay the remaining balance of the mortgage in full, rather than continuing with the standard repayment schedule.
If you’re considering a mortgage with an acceleration clause, or are unsure how it may affect you, a financial advisor can help you understand potential risks.
What Is an Acceleration Clause?
An acceleration clause is a legal provision in a mortgage agreement that allows the lender to require immediate repayment of the remaining loan balance under specific conditions. Unlike a standard mortgage repayment schedule, which spans 15 to 30 years, an acceleration clause can result in the borrower needing to pay off the entire loan amount at once.
This clause is designed to help lenders recover funds if a borrower defaults or violates the loan agreement. However, acceleration clauses do not automatically take effect upon a single missed payment. Instead, lenders must notify the borrower and provide an opportunity to rectify the issue before enforcing the clause.
For example, if a homeowner with a $250,000 mortgage has repaid $50,000, but defaults on payments, the lender can invoke the acceleration clause, requiring the borrower to pay the remaining $200,000 immediately. Failure to do so could lead to foreclosure.
What Triggers an Acceleration Clause?
An acceleration clause can be triggered when a borrower violates loan terms. Here are four common things that could do that:
- Consistently missing payments. If a borrower repeatedly misses mortgage payments without making arrangements with the lender, the lender may invoke the acceleration clause.
- Defaulting on property taxes or insurance. Many mortgage agreements require borrowers to keep property taxes and homeowners insurance current. Failure to do so can be considered a breach of contract.
- Unauthorized transfer of ownership. If the borrower transfers ownership of the home without notifying the lender, the acceleration clause may be triggered under the due-on-sale clause.
- Bankruptcy filing. In some cases, filing for bankruptcy may violate mortgage terms, prompting the lender to accelerate the loan.
Acceleration Clauses: A Closer Look
Lenders primarily enforce acceleration clauses in cases of significant borrower default. If a homeowner misses multiple mortgage payments, fails to maintain homeowners insurance, or neglects property tax obligations, the lender may choose to invoke the acceleration clause and demand full repayment of the loan. However, lenders usually attempt to work with borrowers first by offering solutions like loan modifications, repayment plans or forbearance agreements before taking such drastic action.
Certain types of borrowers or circumstances may be more susceptible to acceleration clauses. High-risk borrowers, such as those with poor credit histories or inconsistent income streams, may have a greater chance of triggering an acceleration clause if they struggle to meet their mortgage obligations. Additionally, investors or borrowers with non-owner-occupied properties might face stricter enforcement of acceleration clauses, especially if they attempt to transfer property ownership without lender approval, violating the due-on-sale clause.
In most cases, a typical homeowner making regular payments on a primary residence does not need to worry about acceleration clauses. However, anyone taking out a mortgage should carefully review their loan agreement and consult a financial advisor or real estate attorney to understand their responsibilities and avoid potential risks.
Bottom Line
An acceleration clause allows lenders to demand full repayment of a mortgage if a borrower misses payments, breaks loan terms, or sells the property without approval. While it protects lenders, it can create financial challenges for homeowners. To avoid issues, borrowers should make payments on time and communicate with lenders if financial difficulties arise.
Financial Planning Tips for Homebuyers
- Whether you’re saving to buy a home or put a child through college, a financial advisor can work with you create a plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s affordability calculator can help you estimate how much house you can afford based on several key inputs.
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