Since mortgages are often hundreds of thousands of dollars, this clause protects lenders when borrowers miss payments or break other stipulations. It can also help lenders avoid the costly process of foreclosure.
How an Acceleration Clause Works
Acceleration clauses vary from lender to lender. In most cases, however, they may be initiated if you miss too many payments, file for bankruptcy, cancel your home insurance, don’t pay your property taxes, or fail to keep your home in livable condition. It’s important to note these clauses rarely go into effect automatically. Lenders can decide whether or not they’d like to use them. Often, mortgages include acceleration clauses known as “due-on-sale” clauses to protect a lender in the event you transfer the rights to the property. If you do so without getting written consent from your lender in advance, you may face this clause. For example, let’s say you have $150,000 left on your mortgage. Unfortunately, you lose your job. You miss several monthly mortgage payments, which include your property taxes and home insurance. As a result, your mortgage lender decides to initiate the acceleration clause in your contract. You’re now required to repay your entire mortgage balance—$150,000—immediately. If you don’t, your home may go into pre-foreclosure.
What To Do if Your Lender Invokes an Acceleration Clause
If your lender decides to exercise the acceleration clause in your loan agreement, they’ll likely notify you, stating the reason for the acceleration, your mortgage balance, plus any unpaid interest and the payment due date. Having a lender invoke an acceleration clause can be nerveracking, especially if you don’t have enough cash on hand to pay off your loan. The good news is there are a few options at your disposal. Acceleration and foreclosure laws vary from state to state, so be sure to check out your state’s specific laws.
Loan Modification
A loan modification is when you can restructure your loan and make your payments more affordable. It may be the best option if you feel confident you can repay your loan over time with smaller monthly payments.
Mortgage Reinstatement
Your lender may ask you if you’d like to reinstate your mortgage to avoid foreclosure. This will outline how much you owe in order to catch up on your payments and applicable fees.
Pre-foreclosure
If you’re unable to repay the loan, even with a payment plan, you’ll go into pre-foreclosure. This is when you can get up to speed on your payments, refinance, or move forward with a short sale. As long as you have equity in your home (the difference between your mortgage balance and home value), refinancing may be a good option to consider.
