An acceleration clause in real estate allows the lender or loan holder to require repayment in full if the borrower defaults. This is known as accelerating the loan and prohibits the borrower from making additional installment payments toward their balance.
The most common cause for accelerating a loan is when a borrower misses a monthly payment. However, a real estate contract might activate an accelerated clause for other reasons, including transferring the home’s title without permission.
Why Would You Want a Real Estate Acceleration Clause?
As a real estate investor, adding an acceleration clause to your contract can be beneficial for several reasons, including:
Manage Nonpayments
Missed payments can be expensive for the creditor, who might rely on monthly mortgage income to make their own loan payments. If a buyer continues to miss payments, it might affect the owner’s ability to make payments on other assets, putting them at financial risk.
Manage Delinquencies
Even late payments can be inconvenient for everyone involved. The investor might not know the borrower’s intentions, putting them in a difficult financial position. A real estate acceleration clause gives investors another option to collect on their loan or take back ownership of the property.
Protect Against Bankruptcies
Bankruptcies provide consumers with financial protection. A bankruptcy can put a lender in a difficult position where they might not get their money back. An acceleration clause triggered by bankruptcy helps protect the creditor.
Legal Protection From Unauthorized Transfers
Creditors assess and screen borrowers carefully before agreeing to issue them a mortgage to minimize the risk that comes with lending. If the approved borrower transfers the property to another borrower without approval, it puts the lender at risk.
An acceleration clause is a layer of protection that allows the lender to pull out of the agreement if they don’t want to lend to the new holder.
Protect Your Asset
A lender is included on the deed until the borrower repays the loan in full. That means if the current homeowner doesn’t maintain and repair the home properly, it also affects the lender.
If the borrower defaults on the loan triggering foreclosure, the lender might be left with an uninhabitable property or a property worth less than it was initially. A real estate acceleration clause is a form of asset protection that safeguard s you from unnecessary damage to your property.
What Happens When a Lender Accelerates a Loan?
Once a borrower defaults or voids the real estate contract, the lender or lien holder might choose to accelerate the loan. This requires the borrower to pay off the full balance plus interest immediately, as the contract is now canceled. If the borrower cannot pay the balance in full, they might lose their home to foreclosure.
The property then returns to the original lender or investor, who might choose to sell to a new borrower. Most states require a lender to notify the borrower that they expect payment in full. This is called a breach notice, and it includes the defaulted payment or reason for accelerating the loan, any available options to avoid acceleration, a contract date, and the date by which the loan is expected to be paid in full. Some states allow the borrower to reinstate the loan to avoid foreclosure.
What Is the Purpose of an Acceleration Clause?
The purpose of an acceleration clause is to protect the lender or investor from excessive risk. Otherwise, the lender might have to sue the borrower each month for nonpayment, which can get expensive. If the borrower becomes delinquent, the creditor might also have to cover the cost of foreclosure and eviction.
What Triggers an Acceleration Clause?
The most common cause of accelerating a loan is when a borrower misses multiple payments. Some clauses allow lenders to accelerate a loan after just one missed payment, but some wait until the borrower is at least 90 days past due.
Other triggers that can accelerate a loan include the borrower canceling their homeowner’s insurance policy, failing to keep up with property taxes, filing bankruptcy, or transferring the deed without authorization from the lender.
Who Benefits From an Acceleration Clause?
Most commonly, the seller or lender benefits from an acceleration clause in a real estate contract. An acceleration clause can also benefit any real estate investors who have financial interests in the property.
An acceleration clause helps manage the risk of lending money. It prevents the lender from having to track down missed payments and pay costly legal fees.
The lender might allow the borrower to reinstate their loan, or they might modify or refinance the loan, which gives them the opportunity to pull out or change the loan terms so they’re more favorable.
How Long Does a Borrower Have to Address Mortgage Acceleration?
This timeline varies, depending on the borrower and the agreed-upon contract at the time of the sale. Traditionally, lenders wait at least 90 days to trigger an acceleration clause. Then, many lenders give the borrower another 30 days to pay in full or begin foreclosure proceedings.
What Is the Purpose of Accelerating a Mortgage Loan?
The purpose of accelerating a mortgage loan is to receive full payment on the balance owed when a borrower fails to maintain their end of the contract.
An acceleration clause is just one thing to consider when investing in real estate. Scheduling a free strategy session is a great way to explore your options and pinpoint specific ways to minimize your risk with real estate and other long-term investment strategies.
