A mortgage agreement is a big document, and there are a lot of unfamiliar phrases and fine print involved – but it’s essential to take your time and make sure you understand everything you’re agreeing to when you sign. Otherwise, something like an acceleration clause can take you by surprise.
An acceleration clause is a provision or covenant in a mortgage contract that allows your lender to “call” the loan, requiring repayment in full within a painfully short time frame (often 30 days) to avoid foreclosure. If you can pay the loan, the bank gives you the title to the house. If you cannot, the bank will move to repossess.
What Can Trigger an Acceleration Clause in Your Mortgage?
You need to review the acceleration clause in your contract to see the specifics that apply to your situation, but several common situations are usually listed, such as:
- Missing multiple mortgage payments: Any delinquency on your loan could, theoretically, trigger an acceleration clause, but lenders vary on how fast they’ll act when you start missing payments. Most lenders aren’t aggressive (or anxious) enough to call your loan due over a single missed payment, but multiple missed payments could definitely do it.
- Canceling your homeowners insurance: Homeowners insurance is a requirement of every mortgage because it protects the lender’s interests. If you lose your homeowners insurance or stop paying it, that will almost always trigger an acceleration clause.
- Forgetting about your property taxes: Property taxes have to be paid, and failing to do so can result in liens against your property – and that affects the bank’s interest in your home, so that can naturally result in acceleration action.
- Making an unauthorized transfer of the property: Maybe you want out of your mortgage and your adult son wants to take it over, or maybe you want to transfer the title to your LLC for tax purposes. Either way, you need to make sure that you have your lender’s consent to do so, or that could trip the switch on the acceleration clause.
- Filing for bankruptcy: Typically, filing for bankruptcy won’t cause your lender to accelerate the mortgage unless you’re already behind on your payments. If you are, however, the bank will most likely take that step so that they can protect their interests during the bankruptcy process.
What Happens Once a Mortgage is Accelerated?
Once something happens to trigger your mortgage’s acceleration clause and the lender finds out (and they will definitely find out), you will receive a notice in the mail. Typically (but not always), this first letter will be a notification that you are in breach of your mortgage agreement, along with a time limit in which to rectify the breach before the acceleration clause is invoked.
In many cases, this means catching up on those missed mortgage payments, but it could also mean working with your lender to fix another issue.
For example, if your taxes went unpaid, your lender may want you to set up an escrow account so that they can, in essence, make sure that the issue doesn’t happen again. If your homeowners insurance was canceled, the lender may buy the insurance for you to protect their investment but require you to pay them back through additional costs tacked onto your mortgage. This “force-placed” or creditor-placed insurance is typically more expensive, but it will allow you to keep your home.
If you’re unable to cure your default on the loan or rectify the breach in your contract during the specified time, the lender will then typically move to accelerate the mortgage. At that point, you’ll receive a second notice that:
- Gives you the contact information for the person or department handling your mortgage
- Explains the reason for the acceleration of your mortgage
- Tells you exactly how much you owe in mortgage and interest to clear the loan
- Explains the time limit to make the payment in full
It’s also possible that your lender will include information on other options you may have to somehow reinstate the loan – but do not count on it.
What Kind of Options Do You Have to Settle an Accelerated Mortgage?
You may want to get back into your lender’s good graces – but it can be really hard to do if you don’t have a pile of money laying around. Fortunately for you, lenders seldom are eager to foreclose. You can usually settle the accelerated mortgage and get back on track by simply being responsive to the very first notice you see and working with your lender to explore all your options.
Some possibilities include:
- Mortgage reinstatement: This could be as simple as catching up on the mortgage, if you can afford it. If not, you can talk to your lender and see if you can get a repayment plan.
- Mortgage repayment plan: Some lenders will allow you to make up missed payments a third at a time, while others will tack the missed payments onto the end of your loan. You may not know all of the possibilities until you ask.
- Mortgage refinancing: If you have a lot of equity in your home but the payments have become hard to handle, you may be able to refinance to a more affordable monthly payment.
- Mortgage forbearance: If you believe your situation is temporary, you may qualify for a forbearance from your lender, which is simply a pause on your payments by the lender’s consent.
If your financial situation is really dire or there’s simply no realistic way to remedy the situation, you may need to consider a deed in lieu of foreclosure or a short sale. While both of these require you to give up your home, they can allow you to get out from under your mortgage and be less damaging to your credit than a foreclosure. Ultimately, the best way to avoid triggering your mortgage’s acceleration clause is by understanding what it is and what to do if you’re in any financial trouble to protect yourself.