Acceleration Clauses In Mortgage Loans Are No Joke, So Pay Attention

So you’ve finally closed escrow, and the house is yours. All that paperwork at closing time was a pain, and after all those signatures and initials and all that moving, you can settle in for a long winter’s rest.

But what about the small print on that mortgage paperwork? Realtor’s Audrey Ference says that, unbeknownst to many new homeowners who took out loans to buy a house, odds are your contract includes an acceleration clause. No. That doesn’t mean driving faster to get to the bank. “It means that if you break any terms of your loan, your lender can demand “accelerated” payment,” says Ference. “In other words, rather than paying that money back over 15 or 30 years as planned, the whole amount is due immediately.”

She goes on to explain that an acceleration clause is a part of the standard mortgage agreement used in many residential mortgage contracts. And even if your mortgage is not backed by Fannie Mae, most lenders have some form of an acceleration clause in place. You’re fastidious about your finances? Then there is no need to fear this clause. If you adhere to your mortgage contract by paying your monthly bill on time and otherwise, you will avoid ever triggering this acceleration clause. But if you violate any of your contract’s terms, it’s anybody’s ball game.

“If any terms of the loan agreement are not met, the mortgage note holder has the right to call the note,” explains Ralph DiBugnara, a vice president at Residential Home Funding. And they mean business.

Ference says the most common reason lenders accelerate a mortgage is due to failed monthly mortgage payments. But most mortgages also allow acceleration if another part of the contract is breached. Other common covenants that could trigger acceleration include not having or keeping up with home insurance, being delinquent on property taxes, letting your house fall into ruin, or trying to transfer the property without approval from the lender.

Wish you had read that fine print a tad more carefully now? Each mortgage contract is different, so make sure to read yours carefully to know what could trigger your acceleration clause.

If you’re wondering how all this works, generally a letter will arrive informing a borrower that the lender has triggered the acceleration clause. The letter will specify the amount due, consisting of the balance of the loan plus interest on any missed payments. It will also include the date by which you must pay up, usually within 30 days of receiving the letter. If this reminds you of old silent movies where someone gets tied to the railroad tracks, it kind of gets worse. Because if you can’t pay, the lender will proceed to foreclosure, where it assumes ownership of your home in an attempt to recoup its costs.

It’s important to note that even if your mortgage is accelerated, however, you can still avoid foreclosure. Most lenders will let you work with them to fix the problem and have your mortgage reinstated — anything from paying the missed payments (with interest) to fixing whatever caused the lender to call the loan. Sometimes, your lender will also restructure your loan, called loan modification, making your payments smaller so that you can afford them. They are not thrilled about ending up with your house either, but they are, after all, the entity that played a huge role in making ownership of that house possible.

Realtor, TBWS