What is an Acceleration Clause?
Acceleration clauses are present in almost every single mortgage home loan. It is a clause that requires the loan borrower to pay back the balance of your loan in full if it is put into action because of certain circumstances.
These are also referred to as mortgage acceleration. It is designed to protect the lender from a loan default where the balance is not paid. Some of the conditions that can enact the acceleration clause include missing monthly payments or canceling homeowners’ insurance.
The Process of the Acceleration Clause in Action
This clause can be put into motion after missing just one monthly payment. Most often a mortgage lender will allow for two or three missed payments before the clause takes effect. It is all dependent upon your personal contract agreement and any applicable state laws.
If the borrower is not able to pay the loan by a set date (most often 30 days after the borrower has received an acceleration notice letter) the foreclosure process may begin at the request of the lender. If the borrower can pay the outstanding balance owed, they are then the sole owner of the home and the lender has no right to a lien on the property.
Situations That Can Activate the Acceleration Clause
Exactly what activates an acceleration clause on your loan will depend upon the specific wording in the contract you sign at closing for your home. Some common acceleration clause activators include:
Missed mortgage payment
Most often it takes two or three missed payments for the acceleration clause to take effect on your home loan. Make sure to check your loan documents so that you are aware, some loans state that just one missed payment can be a trigger.
Cancelling Insurance
If you at any time cancel your homeowner’s insurance without immediately replacing it this can enact the acceleration clause.
Unauthorized Transfers
The mortgage lender needs to be one of the first to know you plan to sell or transfer property ownership to someone else. You can’t have someone new move into your home and take over your payments without notice and approval.
Not Paying Taxes
Property taxes are mandatory. If you fail to pay them this gives the local government the ability to put a lien on the property. Failing to pay taxes is often included as a means of enacting an acceleration clause.
Bankruptcy
If you file for bankruptcy, it can mean that the acceleration clause in your loan takes effect. This is to help ensure your lender can collect the money they are owed.
Your Options When Acceleration Begins
Modification
The foreclosure process can be long and expensive on the part of a lender. In some cases, it is more beneficial for a lender to offer a modification to loan terms. This can include lowering the interest rate or extending payments to make them affordable to the borrower. This is the solution that permanently alters the state of your mortgage for the rest of its life. In order to get a modification from your lender, you may need to submit financial paperwork as well as a letter explaining your current financial situation.
Forbearance
This is the act of temporarily pausing all required mortgage payments when the borrower is going through financial hardship. These payments are still reported as on time to any credit bureaus to help save you from taking a hit to your credit score and history.
This is only a temporary suspension of payments for an agreed period of time. At the end of this pause, you will be required to make up any missed mortgage payments through a lump sum or a modification plan.
Refinance
This is the act of taking out a new home loan on new terms that are more affordable to enable you to pay off your loan. The new loan you take on will pay off the old mortgage and you will start fresh with new payments. This is a good option if you have plenty of equity in the property, but if you have already missed payments, it may not be a viable option.
Short sale
If you owe more to your lender than the current fair market value of your home you might get approval from your lender to sell the home at fair market value and the lender will take a loss on the difference that you owe.
For most homeowners’ acceleration clauses will not come into play on their mortgage. Even if this worst-case scenario does happen you may still be able to work something out with your lender to avoid making a big lump sum payment on the remainder of your mortgage balance. The trick is to stay in honest and open communication with your lender.
For more information on buying a home in Park City and surrounding areas please contact me anytime.
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