There are terms on a mortgage that a lender will make borrowers follow. Many of these terms are tied to an acceleration clause. This clause is not often known to the borrower, and they could face major financial duress if it was put into effect.
The acceleration clause is, in mortgage terms, to protect the lender in the event the borrower breaks any of the terms of the loan.
The Clause
Most lenders use an acceleration clause with their mortgages. Any Fannie Mae loans have this clause built into the terms. There is less than twenty percent of loans that do not have this clause in them. This means most homeowners should be wary of breaking any terms of the loan.
Few homeowners plan on violating the terms of a mortgage. The most common term of a mortgage to pay attention to is the monthly payments. Some loans do change the amount a homeowner owes for their payments, so be sure to pay attention to any changes written into the contract.
Any terms that are violated can activate the acceleration clause. Once this clause is activated, the loan duration is thrown out the window. A homeowner may have a thirty-year loan that is not due to be paid in full until now. The lender can demand their full amount to be paid immediately.
Reasons Acceleration Clause Activates
The most common reason this clause would be activated is a lender is not getting their monthly payments. It may be the first step in the process of the lender foreclosing on the home. However, there are other ways for a borrower to activate this clause.
A lender requires all homes with a mortgage to have home insurance. Canceling this policy is a breach of contract. Similarly, not paying property taxes will violate the terms of a mortgage. Even not maintaining the house to the standards of the lender can activate this clause.
Do not attempt to sell or transfer the property without first contacting the lender to let them know of the plan.
How It Happens
Once a lender has chosen to use the acceleration clause, a homeowner is going to receive a formal letter. This letter will explain that the clause has been activated and will give information about the remaining balance of the loan. This may include interest on missed payments. The date that the loan has to be repaid with be in this letter and it is likely a month after the letter arrives.
If a homeowner is unable to pay this amount, the lender will proceed with a foreclosure. The foreclosure is a way for the lender to try to make up for their lost profit on the house. They will obtain the home and try to sell it.
There is no need for a lender to use an acceleration clause to foreclose on a house. They may choose to before starting the process to give the homeowner a chance to pay the loan back. It is a formal declaration that the foreclosure process is going to start but it is not a needed step for a lender.
Talk To The Lender
Many homeowners make the mistake of avoiding their lender at all costs once they get an acceleration clause letter. This is the opposite of what they should do. A conversation with a lender could save the house. Most lenders do not want to foreclose on a property.
Ask the lender about options. Few homeowners have the money to pay back their mortgage. The lender may be willing to restructure the loan or reinstate the old loan terms if missed payments are brought up to date.
The best thing a homeowner can do is follow their loan terms. If they are unable to abide by these terms, they need to contact their mortgage lender. Talking with a lender can save a homeowner from facing an acceleration clause letter or even foreclosure.
