When you take out a mortgage, you plan on paying it back over 15 or 30 years. But in some cases, the lender can demand full repayment sooner. Mortgages allow for this possibility with acceleration clauses.
What Is a Mortgage Acceleration Clause?
An acceleration clause is a provision in a mortgage that allows the lender to require the full repayment of the loan early.
“A mortgage by its terms allows the borrower to pay a debt in installments over time, and an acceleration clause removes the right of the borrower to do that. So it makes it where all of the indebtedness is due and payable,” says Marty Green, principal at Polunsky Beitel Green.
A lender has the right to invoke an acceleration clause in scenarios that are specified in the mortgage agreement. Often, lenders accelerate a home loan because the borrower isn’t making payments.
“If you violate the terms of your mortgage agreement or your loan agreement with a lender, and they call you on that violation, that acceleration means basically that they’re saying, ‘Either pay us back in full now, or we’ll now kick in the terms of the foreclosure process,'” says Kelli Fogarty, senior vice president and counsel to the president at Advocus National Title Insurance Company.
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Why Do Lenders Require Loan Acceleration?
Lenders include acceleration clauses in mortgage agreements so that they have a straightforward process for getting their money back if a borrower defaults on the home loan or doesn’t adhere to the terms of the agreement.
If there were no acceleration clause, a lender wouldn’t have a way to call the entire loan due at one time. If a borrower defaulted, for example, the lender would have to sue the borrower again and again for each missed payment.
“It’s a more efficient way to exercise the lender’s remedies,” Green says.
When Do Lenders Invoke an Acceleration Clause?
A variety of scenarios can lead a lender to accelerate a mortgage. Many of these occur when the borrower fails to uphold their end of the bargain, but acceleration can also result from circumstances outside of the borrower’s control.
Failing to Make Payments
If the borrower stops making monthly payments, the lender will contact them and ask them to “cure” the mortgage by paying the amount they are behind on. If the borrower doesn’t bring the loan current or enter into a forbearance agreement, the next step for the lender is acceleration.
Failing to Pay Property Taxes, Homeowners Insurance and Homeowners Association Assessments
Mortgage agreements require borrowers to pay property taxes and homeowners association fees, if applicable, and to maintain sufficient homeowners insurance. Falling behind on these obligations doesn’t usually result in acceleration right away. For example, if a borrower lets their homeowners insurance lapse, the lender will typically respond by purchasing a force-placed insurance policy — a more expensive insurance policy that the lender imposes — for them. But consistently failing to pay these items can eventually lead to acceleration.
Transferring the Property Without the Lender’s Permission
Mortgage agreements typically prohibit transferring or selling the property without the lender’s permission.
This might be achieved through an alienation clause restricting property transfers. “Alienation is basically just anything that you would do to jeopardize the mortgage company’s benefits in or rights in the property, or to give other entities rights in the property that could potentially interfere with the mortgage company’s rights in the property,” Fogarty says.
A mortgage agreement might include a due-on-sale clause stating that the unpaid balance becomes due if the borrower sells the property.
Although there are some protected exceptions, such as transferring property to a spouse, child or living trust, other transfers may prompt the lender to accelerate the mortgage.
“It kind of changes the terms of the loan fairly dramatically from the lender’s perspective such that the lender has a choice at that point to say, ‘Look, wait a minute, this isn’t the deal that I originally contemplated that we were doing in terms of loaning you the money. Therefore, we’re going to accelerate the debt and call it due,'” Green says.
Moving Out Within the First Year
If the home loan is intended for your primary residence, moving out too soon could violate the mortgage agreement and result in acceleration.
“There’s an obligation in those mortgages to move in within 60 days of the date of purchase and maintain it as a primary residence for a period of one year from the date of closing before you could potentially move it to a secondary or an investment property,” Fogarty says.
Letting the Property Fall Into Disrepair
Failing to maintain the property in good condition and receiving citations for code violations can be concerning for a lender. If the borrower doesn’t correct the problem, the lender may go forward with loan acceleration.
Failing to Rebuild After a Natural Disaster
If the home is destroyed in a disaster, the lender may accelerate the mortgage if it determines that rebuilding isn’t possible or if the borrower opts not to rebuild.
Being Subject to Eminent Domain
If a government entity takes part of a property through eminent domain, proceeds paid to the borrower must be used to compensate the lender for the value of that portion. If the entire property is taken, then the lender will accelerate the mortgage, and the funds must go toward paying off the balance.
[READ: Mortgage Protection Insurance: What Is It and Should You Get It?]
How to Avoid Loan Acceleration
To avoid the causes of loan acceleration that are within your control, keep your property in good condition and make your mortgage payments on time. Pay your taxes and maintain your homeowners insurance.
If it looks like you’re going to have trouble paying your mortgage, contact the servicer and ask for a forbearance plan.
“Definitely engage with the servicer of the loan, let them know what your situation is, and see what kind of workout you can establish with them,” Green says.
Similarly, get in touch with your servicer if you’re having trouble keeping the other terms of your loan agreement. The servicer may offer a solution. For example, if your property is supposed to be your primary residence but you’ve just been transferred for your job, the servicer might grant you a hardship exemption allowing you to move out within the first year rather than requiring you to sell at a loss.
If you want to transfer your property to someone else, ask your servicer if your loan program allows mortgage assumption. Arranging for the new owner to assume your home loan could allow you to sell your property without triggering a due-on-sale clause. Almost any assumable mortgage that you see today is a government-backed loan. Conventional mortgage lenders rarely ( or never) offer assumability.
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What Can I Do if My Loan Is Accelerated?
Your options if your home loan is accelerated depend on the reason for the acceleration. If the loan is being accelerated due to eminent domain or destruction from a natural disaster, you’ll just need to follow your lender’s instructions.
But if the acceleration is due to nonpayment or another reason, you might be able to avoid foreclosure with one of these alternatives:
Pay what you owe. If you receive a notice of intent to accelerate because you’ve defaulted on the loan, you typically have 30 to 60 days to bring the loan current again.
Enter into a forbearance or loan modification agreement. If you stopped paying your mortgage because of hardship, the lender might be willing to reinstate your home loan with new terms or a plan to repay the defaulted amount. For example, the defaulted amount might be turned into a second mortgage that you repay at the end of the term of your first mortgage.
Refinance. It will likely be difficult to refinance if you haven’t been paying your mortgage if it appears on your credit report. But if you’re current on payments and the lender is accelerating because of a separate concern, refinancing with a different lender could allow you to keep the home.
Sell the home. If you can’t afford to bring the loan current and can’t work out an agreement with the lender, you could sell the home and use the proceeds to pay the balance. Even if the home’s price won’t fully cover what you owe, a short sale may have less negative effect on your finances and credit history than a foreclosure would.
Give a deed in lieu of foreclosure. You hand over your title to the servicer and give up your equity in the home. As with a short sale, this may have a less severe effect on your credit than a foreclosure.
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What Is a Mortgage Acceleration Clause? originally appeared on usnews.com