is when a borrower has to repay a loan in its entirety within a short time frame.
Acceleration Covenant Details
When writing a mortgage, a client agrees to pay off the loan after a certain period, usually 30 years. The client pays a specific amount each month. A widespread condition that calls for acceleration covenant usually revolves around payment defaults.
One of the writing methods demands that if the borrower fails to make one payment, they have broken their pledge. And when that happens, the lender has the right to invoke the acceleration covenant to initiate the foreclosure process.
Most of the time, the acceleration covenant doesn't come into effect immediately. After meeting the set conditions, the lender must determine whether to use acceleration covenant. Foreclosure is a long process, and the lender usually ends up losing money in the end.
With mortgage acceleration, the borrower is liable for back interest in addition to the balance of the mortgage. However, the borrower would not have to pay any forward interest that would have been due if the mortgage had continued for the full term. Once the borrower pays off the loan, the lender will get the money back from the loan, but they will miss out on years of future interest payments.
Several reasons can cause acceleration covenant in a loan agreement.
- Cancelation of Homeowners Insurance: The lender would expect you to retain homeowners' insurance. Doing so keeps the property in compliance with the condition in which it was before any damages. The lender must be confident that they will get the most money out of your home if you ever default. Therefore, an activation item is included in your acceleration clause when you cancel homeowners' insurance. The lender is more likely to purchase insurance for you and make you pay for it (called "forced insurance"). Yes, they have this option.
- Non-payment of property taxes: If you refuse to pay property taxes, the government will be able to make a connection to your property and seize it. As a result, an option sometimes in the acceleration covenant is a chance to accelerate your loan if you miss a payment. The mortgage lender is more likely to get you back on the escrow account. This will ensure your property taxes and homeowners' insurance are covered. Including them in installments as part of your monthly mortgage payment provides coverage for them.
- Bankruptcy Filing: If you file for bankruptcy, the lender can trigger your mortgage agreement's acceleration covenant. The reason is that your bankruptcy case challenges your lender's ability to exercise his rights if you default.
Example of Accelerated Covenant
Joe recently lost his job and has been unable to make his mortgage payment three months in a row. After failing to pay his lender, Joe received notice that the accelerated covenant had been enacted due to his lack of payment. Joe has a few options to remedy the situation:
- If your lender activates an acceleration covenant, you may receive a letter in the mail. It should explain the acceleration of your mortgage, as well as the contact details of the lender.
- It will also provide the mortgage balance with any back interest you owe up to this point, along with the payment due date. The due date is usually within 30 days of receipt of the message. If you repay the full balance due, you will fulfill your loan, and the lender will give you the revised title without the mortgage connection.
- If you cannot repay the balance due in that short period, the lender has the right to foreclose your land. However, consider contacting your lender or mortgage servicer to consider possible choices.