An acceleration clause is a provision in a mortgage or other financing agreement. It allows the lender to demand immediate and full payment of the outstanding balance if the borrower breaches certain terms of the agreement.
This clause enables the lender to accelerate the repayment schedule of the loan. The borrower must pay off the loan in full, rather than making payments over time.
Every lender should make sure to include the acceleration clause in the agreement. And every borrower should understand this clause mentioned in the agreement to better the situation in the future.
Let’s dive into the details
What Is An Acceleration Clause In Real Estate?
An acceleration clause is a provision made for the lender to demand immediate and full repayment from the borrower. This would happen if the borrower did not meet certain conditions on his outstanding balance.
Are Acceleration Clauses Legal?
Yes, the acceleration clause is legal especially if it is included in the agreement signed between the borrower & the lender. As per this clause, the lender may issue a notice to the borrower in demand of the entire balance payment in one go.
Failing to make the payment in mentioned days, the lender may take action of foreclosure on the property.
The borrower may speak to the lender about his inability to make consecutive payments and mutually take the decision.
What Triggers An Acceleration Clause In A Loan Agreement?
An acceleration clause can be put into action in certain scenarios. Some of these situations are as mentioned below:
- Payment default: As per the agreement if the borrower fails to make payments consecutively then it may activate an acceleration clause.
- Violation of rules: If the borrower breaches the provision by non-maintenance of property insurance, unauthorized use of the premises or any damage may lead to an accelerated cause.
- Transfer/Sale of property: Transferring or selling the mortgaged property without informing the lender can trigger an acceleration clause.
- Bankruptcy: Once the borrower files a bankruptcy, the lender may process an acceleration clause to avoid self-financial loss due to this incident.
The acceleration clause may differ from lender to lender. Hence, the borrower must go through all the clauses before signing the agreement. And if any of the above situations occurs he can speak to the lender to find a way out.
What Is A Mortgage Acceleration Letter?
A mortgage acceleration letter is a formal communication exchange between the lender and the borrower. This letter is drawn in demand balance loan amount due to a violation of the agreement rules by the borrower.
This letter includes the following details
- Borrower’s personal details like name, communication address, and contact details.
- Lender’s personal details like name, communication address, and contact details.
- Loan details like loan amount, loan tenure
- Reason for the acceleration clause
- Outstanding amount
- Time period to pay the outstanding amount at once
- Action to be taken in order to not binding by the clause.
How To Avoid Mortgage Acceleration
A mortgagor can avoid mortgage Acceleration by fulfilling the obligations laid by the lender. Some of the ways to avoid mortgage acceleration are as below:
- Timely payments: You need to maintain a record of on-time payments, this will withdraw the lender’s attention from the clause. You can ask your lender to auto-debit from your bank account. But make sure you have a well-maintained balance in your account for a successful transaction.
- Speak to your lender: If you facing any challenges with respect to arranging monthly payments then share this with your lender as soon as possible.
- Understand your loan agreement: Make sure you through your lender’s agreement before entering into the transaction & safeguard yourself from this situation.
- Professional advice: Finding it difficult to understand the legal terms then seek professional advice. They will guide you in understanding the situation and give you a suitable solution for the same.
- Lender’s consent for property deal: You will need to take consent from the lender before processing the transfer or the sale of mortgage property. Non-transparency of such a deal can lead to acceleration.
Have a friendly chat with your lender and tell him your genuine situation. They might be able to show you the best way out.
Options For Borrowers Struggling With An Accelerated Mortgage
Let’s find out the options to deal with an accelerated mortgage situation
- Communicate with your lender: Reach out to your lender as soon as possible and explain to him about your situation. Explain to him about the situation whether you want to sell the house or about your financial crisis. Ask the lender for a speculated time or relaxed interest to pay your outstanding payments. Sharing this with the lender can let you relax the stress of an accelerated mortgage.
- Refinancing: Try to work out a refinance option. This will help you work with a lower interest rate, extended repayment tenure, etc. Refinancing will help you by making lower monthly payments. Yet, remember refinance comes with a one-time payment of closing costs and other qualification requirements.
- Government guidance: You can also opt for some government options which would help you in your financial situation. Of course, you may need to provide certain documents as collateral to the government organization to help you with funds.
An accelerated clause is a term added in a real estate agreement in favor of the lender. This clause may point out certain circumstances when the accelerated mortgage can be put into action.
Some of the circumstances like irregular monthly payments, the bankruptcy of the borrower, selling or transferring the mortgaged property without the lender’s consent, etc.
For any such situation, it’s advisable to consult with your lender first to provide you with a reasonable solution to your situation.
Frequently Asked Questions
What happens when the terms of a loan are satisfied?
Once the loan terms are satisfied, the loan is considered fully repaid. The lender then declares the loan closure with a written communication, releases any collateral, and updates the mortgagor's credit report.
What happens when a loan is accelerated?
When a loan is accelerated, the lender would demand for the entire repayment at once in a specific nearby period. If the borrower fails to repay the amount within the time frame then the lender can take a legal option.