A mortgage contract clause that justifies a lender's demand that a lendee pays the entire payment at once in the case of a breach of contract.
Acceleration Clause Details
Almost all mortgage contracts have an acceleration clause. The clause is a risk alleviation measure for the lender in case the borrower is irresponsible or ill-willed. This contract provision requires a borrower to repay all of their loans should they breach their contract. If a borrower breaks any of the mortgage's outlined terms, then the lender can demand an accelerated payment. Typically, a borrower pays off their mortgage in 17-30 months. Still, if there is a breach of contract, the lender will request the total amount of the mortgage in full immediately, as well as any accumulated interest.
The clause itself usually describes the reasons why the lender would demand an accelerated payment. It usually involves payment delinquency. Borrowers can also trigger the clause by failing to keep current with home insurance, not paying property taxes, or allowing the house to fall into disrepair. Bankruptcy and unauthorized property transfer can trigger the clause automatically. If the borrower can't pay the whole amount, the next step is almost always foreclosure.
Because foreclosure can be a lengthy and expensive process, companies usually don't trigger the clause until they have to. Lenders will have options for borrowers to work out their delinquency, like mortgage reinstatement, before resorting to the acceleration clause. Each mortgage contract is different and will have its reasons for triggering the acceleration clause. But all revolve around the same concept and have the same goal.
Example of an Acceleration Clause
Two companies strike a deal over a lot of land for $500,000. The borrowing company will pay off the loan at $41,666 per month. For the first six months, the company pays on time. However, they miss their seventh payment. The lending company considers invoking the acceleration clause, but with six consecutive payments, the lender decides to investigate the situation first.
Unfortunately, it turns out the buying company is struggling financially and on the verge of bankruptcy. To protect their assets, the lender ultimately decides to use the acceleration clause. The borrowing company receives a letter in the mail stating that the lender is requesting the full remaining amount within 30 days. If they pay the money back in full, they've satisfied the loan. They'll also receive a new title in the mail without a lien.
Since the borrowing company was already in a bad financial situation, it does not have the resources to do so. So, the lending company takes back the land and keeps the $250,000 the borrower already paid back.
Acceleration Clause vs. Acceleration Covenant
Does "acceleration clause" sound familiar? If so, you probably already know it as "acceleration covenant." The difference between the two terms is that real estate uses the acceleration clause when dealing with mortgages. The real estate world uses "acceleration covenant" in commercial loan situations, but the term is more for lenders who finance businesses and deal with general loans.