What is the acceleration clause in a loan agreement?

Definition of the Acceleration Clause and Examples of It

The acceleration clause is often a part of the loan agreement, allowing the lender to demand that you repay the outstanding loan balance immediately if you fail to meet certain conditions. The lender can invoke this clause if you default on payments repeatedly or violate the contract in other ways.

How Does the Acceleration Clause Work?

Acceleration clauses vary from lender to lender. In most cases, they can be triggered if you miss payments repeatedly, file for bankruptcy, cancel your homeowner’s insurance, fail to pay your property taxes, or do not keep your home in livable condition. It is important to note that these clauses rarely come into effect automatically. The lender can decide whether or not they want to use them.

What to Do If Your Lender Activates the Acceleration Clause?

If your lender decides to activate the acceleration clause in the loan agreement, they will likely notify you, indicating the reason for the acceleration, your loan balance, any unpaid interest, and the due date for the payment.

The activation of the acceleration clause by the lender can be frustrating, especially if you do not have enough cash to repay the loan. The good news is that there are some options available to you.

Loan Modification

A loan modification is when you can restructure your loan and make the monthly payments more manageable. This may be the best option if you are confident in your ability to repay the loan over time with lower monthly payments.

Loan Reinstatement

Your lender may ask you to reinstate your loan to avoid foreclosure proceedings. The amount you need to pay to settle overdue payments and applicable fees will be specified.

Pre-Foreclosure Stage

If you are unable to repay the loan, even with a payment plan, you will enter the pre-foreclosure stage. This is the stage where you can catch up on missed payments, refinance, or proceed with a short sale. As long as you have equity in your home (the difference between the mortgage balance and the home’s value), refinancing may be a good option to consider.

Takeaway

The acceleration clause in a loan agreement gives the lender the right to accelerate repayment of the loan if you fail to meet certain conditions. Acceleration clauses are common in mortgage loans. Missing mortgage payments, filing for bankruptcy, canceling homeowner insurance, and other reasons are some of the triggers that may cause your lender to activate the acceleration clause. If your lender activates the acceleration clause, you may want to consider loan modification, loan reinstatement, or pre-foreclosure options.

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Source: https://www.thebalancemoney.com/acceleration-clause-5199065

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