Finding a lender and signing a mortgage contract for the first time is terrifying. If you’re new to real estate, there are so many terms and clauses thrown in there. You should read every single one and learn what each means before giving anyone your signature.
Now, most mortgage contracts include a “loan acceleration” clause. That’s a confusing string of words. Acceleration sounds like a good thing but in reality, an acceleration loan is a testy beast.
To give you a hand, we’re going to go over what a loan acceleration clause means for you when it comes to real estate.
What a Loan Acceleration Clause Means in Real Estate
So, what exactly is a loan acceleration clause?
When you sign any contract, there are a set of commitments you’re making to the lender. These vary per contract but they’re always listed explicitly.
If you break a commitment, acceleration allows your lender to require all the money owed. This includes the interest on that money but it doesn’t include the taxes that would accumulate later on.
This means they can put the property into foreclosure.
When it comes to a mortgage or any other real estate loan, there a few main commitments you’re making. They include:
- You’re expected to make a monthly payment on time.
- This property is your responsibility. You can’t sell it to anyone else without the permission of your lender.
- You have to have home insurance the entire time.
- You always have to pay your property taxes on time.
- You’re expected to take care of the property.
The most common reason an acceleration happens is from nonpayment or late payments.
Keep in mind, if you break one of these clauses triggering the loan, acceleration isn’t automatic. It’s entirely up to the loan lender. They have to examine all the facts of the situation before they decide to enact the clause.
When they do choose to enact the clause, they lose out on money, specifically the interest you’d be paying while still paying off the loan.
So, not all lenders jump on the acceleration clause for just any infraction. They’re looking for serious issues because they don’t want you to default. They don’t want to lose interest on the money they loaned you.
One thing to keep in mind is that if you fix the issue before they enact the acceleration clause, they’re not able to. Imagine you missed a payment and your lender decided to enact the clause. But, before they got the chance to enact it, you catch up on your payments so your lender can’t bring up the clause or throw your property into foreclosure.
What Happens With a Loan Acceleration Clause
If your lender decides to enact or invoke loan acceleration, they have to send you a breach letter to notify you.
This letter likely states that you’re on the brink of foreclosure. If you don’t remedy the situation, they will take your property.
These letters may also state that you owe the entire loan balance. You’re normally given 30 days to pay this off and make things right.
When your issue involves payments, your lender waits a few months before sending you a letter. According to federal law, a lender can’t foreclose on your home due to nonpayment unless it’s been over 120 days.
You need to hire a lawyer if you receive a breach letter. You don’t want to end up in a mess you can’t fix or being mistreated by your lender. A lawyer can go over your options so you don’t lose your property.
How to Get Out of Loan Acceleration
You can remedy a loan acceleration with your lender. In most cases, this only happens if the acceleration is due to payments. But there are other options for you and your lender to consider.
Most lenders prefer to make an agreement with you. If they don’t believe you can pay off the loan right away, it’s only going to hurt them to enact acceleration. And it’s a headache to go through a foreclosure, even for the lender.
You can agree to a mortgage reinstatement. A mortgage reinstatement is a new loan repayment plan that’s agreed on between you and the lender.
With a mortgage reinstatement, you still have to pay the money you’re behind on but some lenders require you to also pay the money it cost them to start the acceleration process.
Some mortgage contracts have a mortgage reinstatement clause and some states allow you to apply for a mortgage reinstatement by a deadline. Each state is different on what that deadline is.
Another option is a loan modification. A lender can create smaller payments in the new contract ensuring that you can make your loan payments.
Once you’ve paid everything up and you have an agreement, everything goes back to normal. But, if your lender decides to go through with a foreclosure, they file a lawsuit.
Some states have procedures that the lender goes through without having to go to court.
When the foreclose has gone through, the lender sells that piece of property, often at public auctions.
The Bottom Line
Loan accelerations are a scary and tricky clause in almost all real estate contracts. As long as you keep to your commitments and communicate with your lender, you won’t have to worry. In this article, we explained the basics of loan acceleration and we hope you have a better idea of how acceleration affects real estate.