What clause in a mortgage allows the lender to declare the entire balance due and payable if the borrower misses a payment?

If you own real estate and have a mortgage, chances are your mortgage contract has an acceleration clause. Many people don’t know what an acceleration clause is. Because it’s part of your mortgage contract, it’s good to get familiar with it. 

Here’s what real estate buyers and owners should know about a mortgage acceleration clause, including what starts it and how to avoid this scary situation from happening.

What is an acceleration clause?

An acceleration clause is tucked away in the fine print of your mortgage loan agreement. Borrowers usually don’t know it exists. 

An acceleration clause means that if you break any terms of your mortgage contract, your lender can fast forward your mortgage payments and require you to pay your mortgage in full, all at once. In other words, the acceleration clause lets the bank demand the full balance due (plus late payments, interest payments, etc.) if you miss a certain number of mortgage payments. 

How many missed payments trigger an acceleration clause?

It depends on your lender and your loan documents. If you miss just one payment, your lender may have the right to call the entire loan due. But, usually, you have to miss two or three mortgage payments before your lender will decide to demand full payment on your mortgage loan.

Because of the financial hardship many people are facing now due to the pandemic, many lenders are allowing borrowers to catch up on their delinquent loan payments. But acceleration clauses are a lender's secret tool to protect their investment. It gives them a chance to reduce their costs. If a borrower can’t make their payments, the lender can reclaim the property.

What happens after the acceleration clause is invoked?

If you’ve stopped making mortgage payments, the bank may decide to start a loan acceleration. If your lender activates an acceleration clause, you’ll receive a letter that includes:

• Your outstanding loan balance

• The reason for the mortgage acceleration

• Information about how to contact your lender, and

• Notice that you’re required to pay the full amount back in 30 days 

In most cases, if you don’t pay the full amount back in 30 days then the lender will begin the foreclosure process. But if you pay back your outstanding loan amount, your loan balance will be satisfied and you’ll get the title to your real estate from your lender. 

A lender must protect its investment and it has the right to foreclose if a borrower fails to make their loan payments on an outstanding loan. 

Non-judicial And Judicial Foreclosures

Depending on the state where you own real estate, if you default on your home loan, the bank may file a lawsuit to foreclose on your property. When the process is handled through the courts like this, it’s called a judicial foreclosure. In other states, the bank can decide to foreclose without going through the courts. This is called a non-judicial foreclosure. 

In a judicial foreclosure, if the bank successfully convinces the judge that you have delinquent payments on your outstanding loan, the lender will be able to sell the real estate at an auction. Then the bank will apply the auction proceeds to your mortgage debt. 

If the auction proceeds aren’t enough to cover the amount of the unpaid loan as well as interest, late fees, court costs, and auction costs, the lender can sue the borrower to get a deficiency judgment. A deficiency judgment, allows the lender to pursue you for the remaining balance of the debt that was not covered by the foreclosure sale.

How can you recover from an accelerated loan?

It’s pretty stressful to imagine getting a letter of acceleration and potentially losing your home in foreclosure. It’s important to know that generally speaking, lenders would much rather work with borrowers to settle their debt than go through the foreclosure process. A lender is not in the business of holding and managing real estate because it doesn’t make money that way. In fact, lenders can lose money on foreclosures. 

The bright side is, if you fall behind on your loan payments, most people are usually able to sidestep the acceleration clause by working out a loan modification. A loan modification restructures your loan so your payments are smaller and more affordable. You could also speak with your lender and ask to get on a repayment plan to make up the delinquent payments. This is called mortgage reinstatement. 

If your financial situation prevents you from getting your mortgage reinstated, you may be able to refinance your mortgage to make it more affordable. Refinancing essentially replaces your existing loan with a new one with a lower interest rate and sometimes lower monthly payments. The drawback of a refinance is you may have to pay some or all of the costs you owe if the lender triggered the acceleration clause. You may also have to pay other fees like closing costs and you’ll need a good credit score to qualify for refinancing.

What if I can’t afford to keep my house?

If refinancing or loan modification isn’t an option for you or still doesn’t get you an affordable monthly payment, you still have other options that are better than foreclosure. You may be able to sell your home in a short sale, do a deed in lieu of foreclosure, or file for bankruptcy.

Short Sale

If you can’t afford to keep your house, you can do a short sale, which means you sell your home for less than what you owe on the mortgage. You’ll need to get permission from the lender to do this. The bank and the homeowner both benefit from a short sale because the homeowner gets out their mortgage payments while the lender can save the hassle and cost of the foreclosure process. 

A short sale is different from a foreclosure. With a foreclosure, the bank takes back the property and then tries to sell the real estate for enough to recoup its costs. But in a short sale, a bank goes into it knowing it won’t get all of the money it lent back. For the lender, this is still better than all of the paperwork and red tape of the foreclosure process. Keep in mind that a short sale will damage your credit score. 

Deed In Lieu Of Foreclosure

Another alternative you can look at is a deed in lieu of foreclosure. This is generally a last resort for borrowers who are unable to do a loan modification or short sale and realize they’re going to lose their home. 

A deed in lieu of foreclosure happens when a property owner signs a legal document transferring title to their real estate to their lender in exchange for being released from their mortgage debt. Both sides voluntarily sign the deed in lieu and it’s filed in the court records of the county or city where the real estate is located. 

Bankruptcy

If you’re worried about a deficiency judgment, you can look into bankruptcy to see if it might be a good option for you. Each person’s situation is different so make sure you consider all your options before looking at filing bankruptcy. 

Let’s Summarize...

It’s important to communicate with your lender if you’re concerned about missing a payment on your loan. It’s always best to reach out to the lender before they bring out the acceleration clause in your loan documents. If you’ve received word from your lender that your loan has been accelerated, you should still contact your lender to discuss your options with them. 

In addition to your lender, you can also find help by contacting a HUD-approved housing counselor or lawyer in your area. Knowing what your options are can help you save your home. 

While mortgage acceleration can feel terrifying, you should understand your choices so you’ll know what to expect. With the right information, you’ll be able to deal with your situation in the best way for you.