What Is A Mortgage Acceleration Clause?

If you’re having trouble keeping up with your mortgage payments or some other obligation of your mortgage, you may have received a letter stating that you now owe the entire amount you borrowed. The letter might say you owe your full mortgage balance by a date that can vary depending on where you live. This process is initiated because of something called the mortgage acceleration clause.

Don’t panic – often, you can restore your mortgage by developing a plan to catch up with your monthly payments. Here’s what you need to know about your mortgage’s acceleration clause.

What Is An Acceleration Clause In Real Estate?

An acceleration clause is a provision in your mortgage agreement that defines when and how the lender can “accelerate” the full repayment of the loan. If a homeowner fails to fulfill the terms of their mortgage agreement, they’ll receive an acceleration letter notifying them that the lender has triggered the acceleration clause.

In other words, it accelerates the repayment of what you borrowed plus the interest that accrues after the clause is triggered until full loan repayment occurs.

Are Loan Acceleration Clauses Legal?

Acceleration clauses are legal. When and how they can be enforced will be defined in your mortgage contract.

Additionally, mortgage acceleration and foreclosure laws vary greatly depending on the state you live in, so be sure to check your state’s laws regarding loan acceleration.

If you have any questions about the legality of the acceleration clause in your mortgage contract, speak to the attorney who handled your closing. They should have reviewed it at that time and will be able to explain what your legal options are based on where you live. If you didn’t have an attorney present, speak to your mortgage lender.

What Triggers An Acceleration Clause In A Loan Agreement?

There are several things that could activate an acceleration clause in your loan agreement. Let’s take a look at some of the situations that could prompt a mortgage acceleration clause.

Missed Mortgage Payments

Most commonly, lenders exercise the clause when borrowers become delinquent on their mortgage payments. The conditions under which your loan can be accelerated for nonpayment are defined in your contract and you have rights under federal law. Lenders typically won’t foreclose for nonpayment until you’re at least 120 days late.

Moreover, if this is happening, your mortgage servicer will likely reach out to you to see if they can help. The goal is to keep you in your home, but also to ensure you’re making your monthly payments on time.

Canceled Homeowners Insurance

The acceleration clause can also be triggered if you cancel your homeowners insurance policy. Your lender will require you to maintain homeowners insurance so that the property can be repaired if it’s damaged to restore its market value. The lender has to be sure the home is in sellable condition in case you ever default on the mortgage.

In practice, lenders, including Rocket Mortgage^®, often buy insurance for you and make you pay for it (called “force-placed insurance”) if you cancel or lose your home insurance. But they also have the option to accelerate your mortgage.

Unpaid Property Taxes

Lenders will typically reserve the right to accelerate your mortgage if you miss a payment toward your property taxes. If you don’t pay property taxes, your local government can place a lien on your property and eventually seize it altogether.

In this situation, your mortgage lender will usually pay the taxes for you. They’ll likely make you go back on an escrow account to ensure that your property taxes and homeowners insurance are paid for. These payments will be rolled into your monthly mortgage payment. You’ll owe the back payments to your lender.

Property Destruction

Your servicer can call your loan due if your property is damaged or destroyed because your home is collateral for your mortgage. This doesn’t mean they’re going to make you pay back your loan immediately following a major storm. It does mean you have to work with your lender and your insurance to have the damage fixed or rebuild.

Bankruptcy Filing

Filing for bankruptcy could also trigger the acceleration clause in your mortgage agreement. That’s because your bankruptcy can affect your lender’s ability to exercise its rights if you default on the home loan.

The primary mortgage lender holds a superior position to all other creditors on the real estate purchased with the loan and secured with a mortgage. The bankruptcy court’s primacy in determining creditor payouts can put this agreement in jeopardy. That’s why a lender can call in your entire loan should you declare bankruptcy.

As a practical matter, lenders like Rocket Mortgage often only foreclose if you stop making your payments or fail to make the agreed-upon payments under a Chapter 12 or 13 reorganization bankruptcy. If you do miss your payments, your lender can file for a stay of the bankruptcy and initiate foreclosure proceedings upon approval.

Unauthorized Property Transfer

Finally, an acceleration may be triggered if you attempt to transfer the property to another person or an LLC without your lender’s prior permission. Your mortgage contains a due-on-sale clause – also known as an alienation clause – which is violated by any transfer of property, in turn triggering a mortgage acceleration.

For example, let’s say you transfer ownership of your home from your personal ownership to your business. Your mortgage lender may immediately send you a mortgage acceleration notice. That’s because your lender vetted you, not your business, when it made the loan.

There's an exception by Rocket Mortgage for conventional loans. The details vary based on whether the investor in your loan was Fannie Mae or Freddie Mac. If the investor was Fannie Mae, loans originated after June 1, 2016, may be transferred to an LLC if the client controls more than 50% of the LLC under a K-1 or Articles of Organization.

Transfers are also permitted if the investor is Freddie Mac as long as clients control more than 50% of the LLC. If there are multiple clients on the loan documents, they all have to be partners in the LLC and at least one of them must be a managing member or general partner. If you wish to refinance or modify a loan in the future, the loan has to be put back in the name of the original owner. Finally, the loan must be at least 12 months old.

Additionally, during a client’s lifetime, certain family members may take over the property without assuming the loan. After a client passes, successors in interest may take over payments without triggering an acceleration, regardless of investor. However, if you wanted to refinance, the loan would have to be in your name, which would require assuming the loan.

There are other instances in which a title transfer is permitted, but your servicer may require additional information from you and/or the person you’re transferring the title to. Make contact with them prior to making any changes.