A topic that sometimes comes up with first-time home buyers when they’re sorting through their loan documents is the acceleration clause. If you’ve never bought a home before, you’ve likely never come across this term and are probably curious about what it means. Below, we’ve provided a detailed explanation of acceleration clauses and why they’re an important part of a home loan agreement.
What Exactly Is an Acceleration Clause?
An acceleration clause is a provision in a loan agreement that allows the lender to require the borrower to immediately repay all of their outstanding loan if certain conditions are not met. It is, essentially, a protective measure for lenders.
This might sound scary, but don’t let it cause you to panic. The clause is only triggered under specific circumstances, such as if the borrower fails to make payments on time or breaches the terms of the loan agreement in another way.
This clause is used to mitigate risk for the lender, allowing them to recover the balance of the loan more quickly if they perceive an increased risk of non-payment. Foreclosures aren’t terribly common today, but they do happen. In 2010, there were about 2.9 million foreclosure filings.
For borrowers, triggering an acceleration clause can have serious financial consequences. Failing to meet the terms of their mortgage can result in their loan becoming due sooner than anticipated.
Is an Acceleration Clause Standard?
First-time home buyers shouldn’t panic if they see an acceleration clause in their loan documents. Almost all mortgage agreements include an acceleration clause. That being said, borrowers should fully understand the implications before signing their loan document.
What Triggers an Acceleration Clause?
The triggers for an acceleration clause can vary depending on the specific terms of a loan agreement but commonly include:
- Missing payments: The most common trigger is when a borrower misses loan payments. Lenders may have a grace period before invoking the acceleration clause, but this depends on the agreement.
- Transfer of the property: Some loan agreements include a “due-on-sale” clause that requires the loan to be paid in full if the property is sold or transferred. This is to ensure that the lender can assess the creditworthiness of the new owner or simply recover their loan.
- Failure to maintain insurance: Failing to maintain the required insurance (e.g., homeowners insurance) can trigger the acceleration clause, as it increases the risk to the lender.
- Property tax delinquency: Failing to pay property taxes can also trigger an acceleration clause because unpaid taxes can lead to a tax lien, which takes precedence over a mortgage or loan.
- Breach of contract: Other breaches of the loan agreement, such as failing to maintain the property in good condition or using the property for illegal purposes, can trigger the clause.
Have Questions? We’ve Got Answers!
It’s normal for first-time home buyers to have questions about their loan documents or terms. If you have concerns that come up at any time, please do not hesitate to reach out. We will be more than happy to assist you.
