An acceleration clause is a contract term, requiring the borrower to pay off the remainder of the loan amount if they default on one or some of the payments. Essentially, the contract performance is “accelerated,” so that the entire amount becomes due when the agreed upon circumstances are triggered. This will be further discussed below.
The specifics of an acceleration clause will largely depend on the terms that the parties agreed upon while negotiating. The borrower might only be required to make up any past missed payments; however, it is likely that they will be required to pay the entire remaining amounts, plus interest and other costs. An acceleration clause in a mortgage loan or other real estate contract can lead to a foreclosure on the property, as the borrower cannot afford to pay the entire remaining amount.
As a borrower, it is imperative that you are able to identify an acceleration clause in any real estate contract you are presented with. The following statement is an example of what an acceleration clause might look like: “If the borrower defaults on any payments due under the contract agreement and fails to cure the issue before the next installment payment is due, then the lender may immediately demand the full amount of the loan; plus, any interest and/or fees.”
What Could Trigger An Acceleration Clause?
The most common types of contracts in which an acceleration clause will generally be found include, but may not be limited to:
- Mortgages;
- Lease agreements;
- Liens;
- Business loan agreements;
- Deeds of trust; and
- Promissory notes.
To put it simply, lenders tend to use acceleration clauses in contracts if they fear that a borrower might not be able to make payments on a loan. Another example of when an acceleration clause may be triggered would be if the lender fears that the borrower will do damage to a property in such a way that could reduce the value of that property.
Once again, the exact terms for an acceleration clause will vary for each individual contract. Generally speaking, it is on the involved parties to agree upon when the clause is put into effect, as well as when the remaining loan amounts are due.
More specifically, an acceleration clause may be triggered for any of the following reasons:
- One missed payment;
- Several missed payments;
- Failure to obtain homeowner’s insurance;
- Failure to keep homeowner’s insurance payments current;
- Breach of any other contract terms; and
- Various property tax issues.
What Should I Do If My Contract Is Accelerated?
It is generally up to the contracting parties to decide what may cause an acceleration clause to be triggered; and, more specifically, when the remaining loan amounts and/or interest will be due once a triggering event has occurred.
It is important to note that acceleration clauses are not generally automatically triggered; rather, the lender must usually inform the borrower of their decision to claim their accelerated payment rights. Lenders must generally notify a borrower that they are about to default on a loan by sending them correspondence, which is known as a “breach letter.”
This breach letter must include specific information, such as how long a borrower has to correct a default. The letter must also contain information regarding what a borrower must do to cure the default, as well as a statement regarding the lender’s right to accelerate payment of the full debt amount.
In addition to the triggers which were previously discussed, some of the most common examples of when an acceleration clause will likely be used against a borrower include:
- If a borrower sells the property on which a mortgage is attached to, also known as “due on sale” clauses;
- When a borrower breaches various other restrictions that a lender has incorporated in an agreement to limit the borrower’s actions; and/or
- When a borrower fails to keep the home in good condition.
Essentially, any time a borrower fails to make payments on a loan and/or adhere to the conditions laid out in the contract in terms of how to satisfy those payments, the lender may claim their legal rights under an acceleration clause and demand immediate payment. It is in this way that an acceleration clause serves as a safeguard mechanism for a lender to ensure that a borrower does not default on a loan. Additionally, an acceleration clause acts as a penalty for a borrower when they default or breach the agreement.
Once again, every contract will contain different conditions in terms of when a contract is accelerated. The majority of contracts that contain acceleration clauses will allow the borrower to cure their default, as well as have their loan reinstated. Although this could mean that the borrower must pay extra interest or fees on top of their remaining balance, most lenders are willing to work with a borrower in this way.
Under specific circumstances, a borrower may be able to negotiate with their lender in order to receive a loan modification. A loan modification is a process that is used to restructure a loan. There are many ways in which a loan can be modified, such as by reducing the amount of payments that are owed each month. Another example of loan modification would be extending the amount of time that a borrower has in which to pay off the remaining balance.
In other cases, the lender may waive their rights to invoke an acceleration clause by entering into another agreement with the borrower. This agreement says something to the effect of, “if the borrower promises to continue to make payments on their loan, then the lender will not seek out legal action in order to accelerate payment.”
One other example of an option that a borrower may have would be if a lender demands payment under an acceleration clause before it is due, or makes their demand in a manner that breaches the agreement. In such cases, the borrower may be able to dispute the issue in court.
What Is Mortgage Reinstatement?
Generally speaking, real estate lenders do not want to be associated with property that has fallen into a state of foreclosure. Because of this, they may allow a borrower to get out of an acceleration clause, thereby avoiding foreclosure. This can be done through a loan modification as was just discussed, or through an alternative repayment plan.
These options are referred to as “mortgage reinstatement,” which means that the lender reinstates the loan but under different term agreements. This can help the lender and borrower continue working together in owning or managing the property. However, the borrower may be required to pay off any costs that were incurred by the lender, as associated with the original acceleration clause issue.
Do I Need An Attorney For Help With An Acceleration Clause?
If you are involved in a contract that includes an acceleration clause, or if your lender has invoked their acceleration clause, you will need to consult with an experienced and local mortgage lawyer.
An attorney will be best suited to helping you understand your legal rights and options according to your state’s specific mortgage and real estate laws. Your attorney can assist in negotiations, and will also be able to represent you in court, as needed, should any disputes arise.
