What Is an Acceleration Clause?
Definition – An acceleration clause is a term added to a contract by which the performance owed to a party as a certain date is automatically accelerated. This may occur when the party breached the contract outright or failed to perform a material function (called “non-performance”), which is essential for completing the performance.
Acceleration Clause Explained
An acceleration clause can either be included in a contract or be incorporated by the operation of law into a contract. A contract without an acceleration clause is called a non-acceleration. Acceleration Clauses are important in contracts since they provide certainty and structure to a contract.
The key element behind an acceleration clause is whether the party can enforce it or not. Suppose a contract contains an acceleration clause, and the party cannot enforce it against the non-defendant. In that case, likely, the term has not been met, and you may have a valid dispute concerning the performance provided by that party.
An acceleration clause is valuable in two regards. First, An acceleration clause protects a party’s interest in the time it takes to complete a contract, rather than the time the contract takes from a party’s expectations. Second, an acceleration clause limits the party’s liability for breach of contract and protects the time-limited performance in respect of which the contract was made.
Acceleration clauses have been used for decades to help mitigate credit risk and increase the likelihood of loans being approved by lenders. This isn’t something new, though. Mortgage lenders have been using this kind of clause since the 1920s and early 1930s. An acceleration clause is a one-way lender that can help alleviate the risk of default during a mortgage transaction.
Lenders use this tool to increase the overall amount of money borrowed while still requiring borrowers to make regular payments on time. Accelerators help lenders meet the rigid deadlines they set for themselves and provide guarantees akin to a spot of credit protection should borrowers fail to make required payments on time. Acceleration clauses in mortgages help lenders to retain the maximum amount of capital for business use.
There are two basic types of acceleration clauses in a mortgage agreement.
- The first deals with loan payments that are accelerated
- The second deals with principal and interest payments that are accelerated only if an acceleration event takes place.
The basic idea is that lenders provide mortgages with terms that reduce risk when they make a loan — but not enough to eliminate it.
Invoking the Acceleration Clause
The Acceleration Clause is a provision in most mortgage loan contracts. The acceleration clause gives the lender the option to demand that the borrower either make good or face foreclosure. In other words, you are offered financial incentives to sell the property faster or otherwise change the terms of your loan. Some lenders may provide you with the opportunity to sell your property for significantly less than your original asking price if you agree to accelerate. In many cases, an acceleration clause is included in a residential mortgage loan as it helps unfulfilled borrowers afford new homes more quickly, reducing the risk of foreclosure.
What Triggers An Acceleration Clause?
In some cases, your lender put an acceleration clause into place when they determine you cannot pay off your debt. In other cases, your lender put an acceleration clause into place because they are worried about your ability to pay off your debt over time.
Below are few points to consider for the trigger of the Acceleration Clause:
1. Missed Mortgage Payments
If you are behind on your mortgage payments, an acceleration clause can trigger. An acceleration clause is either party has missed a legal procedure triggered after a certain number of payments.
2. Bankruptcy Filing
A bankruptcy clause is very easy to set up and comes with some great benefits. If you have an account at a company and cannot make your minimum payments, the company can file for bankruptcy protection. For instance, if you have a large amount of debt but don’t feel like fighting creditors every month, a Bankruptcy clause might be able to convince a judge that you should file.
3. Unauthorized Property Transfer
Transferring a home without the lender’s approval triggers an acceleration clause. The clause gives the lender the right to accelerate your payment if they believe your offer to sell is not realistic.
4. Canceled Homeowners Insurance
During the loan term period, the lender can enforce an acceleration clause if you cancel your homeowner’s insurance.
5. Not Keeping Home In Livable Condition
If you fail to keep your house in good enough shape (by failing to or ignoring a tax or antiquity bill), the mortgage company can demand a sale and acceleration of your payment. If the lender believes that your home is not livable, they will most likely use this option to accelerate your payment.
Your Options After A Loan Acceleration
1. Set Up A Repayment Plan
Mortgage reinstatement is a process by which you can obtain a new loan to pay for items that have been bought with proceeds from your previous loan, provided that these transactions have occurred after the loan has been accelerated. So, for example, if you have received a loan to pay for a house but fail to make your loan payments, then this will be recorded as having happened after the initial loan had been taken out. In this situation, your lender can then re-authorize your loan, reduce the amount you owe, and provide a fresh start with a lesser deposit.
2. Accepting Foreclosure
When your lender approves a loan for foreclosure protection, it gives you 24 hours to decide whether you’ll accept the offer and participate in the foreclosure. During this time, you can make several basic choices.
You can accept the full amount of the loan balance (including accrued interest and fees), accept a lower amount representing your share of the property’s value, or request a trial balance of money to cover future living expenses. At the same time, you work on repaying the loan.
If you are behind on payments on your home loan, and the lender believes that it will take too long to make the loan payment, then there is an option that may help you avoid foreclosure. You will need to surrender your property to the lender.
How to Reinstate the Loan After Acceleration?
There are three main ways you can regain access to your loan:
- You can pay the original amount you owe the lender.
- You can cure any default (for example, if you didn’t provide enough money for your home repairs).
- You can also pay for any other expenses that the lender incurred, but not all of them at once – in other words, you’re free to spread out your payments over time.
In most cases, the lender will offer to reinstate your loan with a reduction in terms and costs. But there are some exceptions to these rules. Lenders can increase the amount you owe over time or extend the date you have to pay the balance at low interest rates. Before making an acceleration request, carefully read the acceleration notice and explain your reasons for wanting more time to pay off your existing loan balance. Make sure you understand all the terms and conditions of the loan before accelerating it — especially any fees, interest charges, and deductions that may apply.
Lenders usually require you to make a reinstatement payment (also called a payoff, the release of acceleration, or non-judicial foreclosure) to reinstate the debt. After you re-establish good standing with the lender, your mortgage or deed of trust and the terms of the agreement remain effective as if no acceleration had occurred.
What can you do if your mortgage is accelerated?
Mark Sherwin, president of SDS Accountants, says that if your mortgage has accelerated, there is still an option to avoid foreclosure. “But once your loan has been accelerated, the time to act is now.”
If your mortgage has accelerated (meaning the lender has decided that it’s too expensive to fix the problem and extend the loan), you’ll need to decide whether to accept the offer and have your loan documents re-processed. You can either accept the offer, get a new loan, or refuse the offer and look for another lender. The lender will have to decide whether they’ll repurchase your existing loan or issue a new loan with lower payments — depending on how much money was misspent in the first place.
What are the differences between an acceleration and demand clause?
The difference between an acceleration and demand clause is generally how it defines the debtor’s obligations. The acceleration clause puts the onus on the debtor to prove they are unable to make their minimum payments, and in some cases, proof can be sought through an investigation. Under a demand clause, however, the lender has the right to suspend payment if they choose immediately.