Generally, acceleration is one of the good words, I’d say. Accelerated courses get you through school faster. Accelerating your car 1.) is fun; and 2.) gets you where you’re going faster. Accelerated restaurant service means you get your food faster. But, like most things in life, there are two sides to the coin. If you’re talking about the acceleration clause in your mortgage, then no, faster is not better.
You’re probably familiar with what a foreclosure is – it’s when a lender takes over a home that they loaned money on. You may not be as familiar with the acceleration clause the lender invoked to begin that foreclosure process.
What Is An Acceleration Clause?
An acceleration clause means that, if certain conditions are met, the borrower will have to pay back the entire loan at once – including the interest that accrued since the clause was invoked. The borrower doesn’t have to pay the interest that would have accrued over the life of the loan, however.
When a mortgage is written, the client agrees to pay off the loan after a certain period of time, say 30 years, by paying a specific amount each month.One of the most common conditions of an acceleration clause typically involves payment delinquency. Depending on the way the clause is written, it may be that if the borrower misses even one payment, then they have broken their promise, and the lender has the right to use the acceleration clause and begin the foreclosure process.
Usually, acceleration clauses don’t automatically trigger – the lender has to decide if they want to use it once all the conditions are met. Foreclosure is a lengthy process, and the lender usually ends up losing money in the end.
What Triggers An Acceleration Clause In A Loan Agreement?
There are several things that could trigger an acceleration clause in your loan agreement. Let’s run through them quickly.
The most common scenario involves missed mortgage payments. As mentioned above, a lender can theoretically call your loan due for just one missed payment, depending on the terms of your mortgage agreement. However, commonly, you have to miss two or three mortgage payments before a lender decides to take this step.
Although missed payments are the usual cause, the following are less common reasons for a loan acceleration.
- Cancellation Of Homeowners Insurance: Your lender will require you to maintain homeowners insurance so that the property can be repaired in line with the condition it was in before any damage. The lender has to be sure they can get the most possible value out of the home in case you ever default. Therefore, one of the things that’s usually included in an acceleration clause is a trigger if you cancel homeowners insurance. In practice, the lender is more likely to buy insurance for you and make you pay for it (called “force-placed insurance”), but they have this option.
- Nonpayment Of Property Taxes: If you don’t pay property taxes, your local government can place a lien on your property and eventually seize it altogether. Therefore, another option frequently found in acceleration clauses is the chance to accelerate your loan if you miss a payment. As a practical matter, your mortgage lender is more likely to make you go back on an escrow account in order to make sure that your property taxes and homeowners insurance are paid by including them in increments as part of your monthly mortgage payment.
- Bankruptcy Filing: If you file for bankruptcy, it may trigger the acceleration clause in your mortgage agreement. The reasoning for this is that your filing for bankruptcy threatens your lender’s ability to exercise their rights if you default.
- 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.
What Happens When Your Loan Is Accelerated?
If your lender triggers an acceleration clause, you’ll get a letter in the mail. It should include the reason for your mortgage acceleration as well as the lender’s contact information.
The meat and potatoes of the letter is that it will also include the mortgage balance with any back interest you owe up to this point, along with a due date for payment. This is typically sometime within 30 days of receiving the letter. If you pay back the full balance owed, your loan will be satisfied, and the lender will send you the updated title without the mortgage lien.
If you can’t pay back the balance due in that short time frame, the lender has the right to foreclose on your property. However, you should consider contacting your lender or mortgage servicer to go over possible options.
Can You Get Out Of An Acceleration?
Losing your home in foreclosure is pretty unpleasant to think about. The good news is, the borrower is generally able to avoid acceleration by working out a loan modification or repayment plan with his or her lender to make up the delinquent payments; this is called mortgage reinstatement. Because lenders prefer not to own real estate, there is usually a variety of options available for borrowers to choose from to get back to being current on their loan payments. The borrower will sometimes have to pay some or all of the costs the lender incurred while dealing with the acceleration, however.
Keep in mind, mortgage acceleration and foreclosure guidelines and requirements vary by state and lender as well as loan type, so your exact situation will depend on those details.
Considerations For Loan Acceleration
Before deciding to move forward with an acceleration, there are several considerations that need to be made, some of which apply to the lender and some that apply to the borrower.
In the event of a mortgage acceleration, the borrower is responsible for any back interest owed up to that point in addition to the balance of the mortgage. However, the borrower doesn’t have to pay any forward interest that would have been owed if the mortgage had lasted for the full term. In this case, if the borrower makes the payoff, the lender gets the money from the loan back, but they lose out on years of potential interest payments.
The investment difference for the lender will be harder to swallow closer to the beginning of the term than if the borrower were near the end of the term because more money goes toward interest than principal at the beginning of the loan. Over time, the balance flips. The longer the amount of time left on the loan, the more likely a lender is to want to work out some other option than to lose out on all that interest.
An acceleration clauseserves as away for a lender to mitigate some of the risk incurred in making a loan by giving them the option to make this call if you default on the terms of the loan in any way.
However, there is a risk for a lender in the use of this clause because there’s a good chance that if you don’t have the money to make your monthly payments, you’re probably not going to have the money within 30 days to pay off your full balance. Given that, they have to know that one likely outcome of this could be foreclosure. Because lenders aren’t in the business of selling real estate, this can be a costly proposition, and they often don’t get enough back to pay off the investment.
On the borrower’s side, the risk is losing the home altogether. The prospect of that will give anyone pause.
If a lender triggers the acceleration for missed payments or any other reason to invoke the clause that isn’t initiated by the borrower, there typically is no prepayment penalty associated with paying off the loan early.
On the other hand, there are instances in which a borrower ends up triggering an acceleration clause through an action of their own on an automatic basis. We’ll get into these situations below, but the important thing to know is that if an action of the client caused the acceleration, they may be subject to a prepayment penalty if the loan calls for it and they are paying it off prior to the end of the time frame disclosed in the mortgage documents
We mentioned automatic accelerations triggered by the borrower above, but what falls into this category? Here are two big examples:
The first is bankruptcy. Because this is either about debt restructuring or limiting liability, bankruptcy could limit the ability of the lender to hold you responsible in the event of default. To guard against this, there may be a clause that your balance becomes due when you file.
An unauthorized property transfer may also trigger acceleration procedures. You can’t have someone else take over the property or assume your mortgage payments without telling the lender. Even when assumptions are allowed, the lender will want to qualify the new borrower in order to make sure they can afford the payments. You also can’t typically transfer your property to an LLC because that limits the options of the mortgage company to get their money in the event of default.
If you’ve done something to trigger the acceleration clause, such as transfer of the property to an LLC, you may be able to get back in good standing and have the acceleration revoked if you reverse the transfer and put it back in your name. If you are able to make your payment and become current again, the lender or mortgage servicer may be willing to work with you.
If coming current right away isn’t possible, you can talk to your servicer about a repayment plan or a mortgage modification in which the interest rate and/or term of the mortgage is modified in order to make the payment more affordable.
Mortgage acceleration isn’t a fun topic to talk about, but it’s important that you understand it so you’ll know what to expect and what your options are, just in case.
If you’re a Quicken Loans® client struggling to make your mortgage payment, we encourage you to contact us. You can look at your options online or give us a call at (800) 508-0944.
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