Foreclosure proceedings are possible because most mortgage loan documentation contains an acceleration clause. This clause gives the lender the right to collect the entire amount due on the loan if the borrower fails to make the monthly mortgage payments.
So, the entire amount of the mortgage loan becomes immediately due and owing, even though the borrower may have missed only one or two of their monthly mortgage payments. If the borrower cannot pay the full balance on the mortgage loan, the lender can foreclose on the property.
The exact number of payments that must be missed before the acceleration clause is triggered depends on the exact wording of the clause in any particular mortgage loan document.
For example, if the entire amount still owing on a mortgage loan is $250,000.00, and the borrower fails to pay their monthly payments of $1500 for three months, the entire balance of $250,000 becomes due and the lender can then file a lawsuit in court to collect the entire $250,000. The lender does not have to sue the borrower every time the borrower misses one monthly payment.
Other events can trigger an acceleration clause. For example, lenders usually require the borrower to maintain some form of homeowners insurance to repair and restore the property in case it is damaged by fire or some other kind of disaster. This is because the lender wants the property maintained at its highest possible value with minimal expenses to the lender, if the borrower should default on payment. The lender is more likely to force the borrower to buy insurance – in general – rather than simply triggering the acceleration clause.
In some cases, filing for bankruptcy by the borrower can trigger the acceleration clause. This is because bankruptcy could affect the lender’s ability to exercise their rights, and the lender wishes to avoid this.
Acceleration clauses can also require payment in full of the mortgage loan if the property is sold.If the borrower transfers the house’s title without getting the lender’s prior written approval, the lender can usually require immediate payment of the full loan amount. If the borrower doesn’t pay back the entire outstanding loan balance, the lender can start a foreclosure proceeding to recover the entire amount of the loan that is still owed as well as possession of the house.
Failure to pay property taxes is another event that might trigger an acceleration clause. If a homeowner does not pay their annual property taxes, the local taxing authority, a city or county government, can place a lien on the property and eventually seize it altogether to satisfy the tax lien. Therefore, acceleration clauses frequently provide for acceleration of the mortgage loan if the borrower misses a property tax payment.
Because this could be as practically inconvenient for the lender as for the borrower, a mortgage lender may assume responsibility for paying the property taxes and homeowners insurance by rolling them into the monthly mortgage payment. Then, acceleration due to the failure to pay property taxes and homeowners insurance premiums cannot jeopardize an otherwise successful mortgage loan.
Today most lenders in the business of making large numbers of mortgage loans are going to protect their interests and include an acceleration clause in the mortgage loan documentation. What triggers it may contain might vary from state to state, but some form of acceleration clause is legal in all states in the U.S.
Are Acceleration Clauses Required?
Acceleration clauses in mortgage loans are not required by law in any state or by federal law. What they can include is variable from state to state. The fact is that they are widely used because they serve the interest of mortgage lenders. They allow the lender to exert significant pressure on a borrower to pay their mortgage, because they can threaten to take the borrower’s home in the event they do not pay their mortgage.
Acceleration of a loan is only possible if both parties to the loan agreement have consented to the acceleration clause in the loan documentation. Neither party can force the other to accept the terms of an acceleration clause, but it would be nearly impossible for the average home buyer to get a mortgage loan to buy a home without one.
The acceleration clause is entered into voluntarily by the borrower when the buyer buys the home with the mortgage and signs the loan documents. Some clauses state specific details about enforcing the clause, such as a minimum number of payments that must have gone unpaid before the lender can collect the entire amount of the loan through foreclosure.
Some critics feel that acceleration clauses are one-sided in favor of the lender. Others argue that they are sometimes necessary to create a strong incentive for the borrower to remain current on monthly mortgage payments.
What If a Mortgage Has No Acceleration Clause?
If a mortgage has no acceleration clause, the lender cannot attempt to claim the entire mortgage amount due in the event of a default in mortgage payments. The fact is that, depending on the circumstances, collecting the whole amount of a mortgage loan is going to be virtually impossible without an acceleration clause.
Today, the mortgage loan that the average American borrower obtains for the purpose of buying a house includes an acceleration clause. Acceleration clauses are a generally accepted way of doing business in the home mortgage loan industry.
Because without an acceleration clause, in the event of a default on a mortgage, the lender would need to resort to other methods to collect unpaid monthly mortgage payments. These methods might include such steps as:
- Asking the borrower to make the agreed-upon loan payments;
- Filing a new and different lawsuit when each monthly mortgage payment goes unpaid;
- Waiting until a number of payments have been missed and pursuing the borrower for all of the unpaid payments.
The fact that each of these options would be inconvenient in the extreme for the lender shows why lenders uniformly include acceleration clauses in home mortgage loans. Today most lenders in the business of making large numbers of mortgage loans are going to protect their interests and include an acceleration clause in the mortgage loan documentation.
Do I Need a Lawyer for Assistance With an Acceleration Clause?
Acceleration clauses can sometimes be complicated, and they can have far-reaching effects on a person’s property rights in the long run. If you need assistance with an acceleration clause, you may wish to hire an experienced foreclosure lawyer for assistance. Possibly the most important kind of help your foreclosure lawyer can give you is to explain the consequences of the acceleration clause in the loan documentation you are planning to sign.
Not only a failure to make your mortgage payments can result in foreclosure, but also failing to maintain mortgage insurance or homeowners insurance can trigger acceleration and foreclosure. Selling your house to your sister without the approval of your mortgage lender is another step that can trigger acceleration and foreclosure.
Your attorney can explain the acceleration clause in your loan documents so that you understand it clearly and can avoid the pitfalls. Also, in the event of a lawsuit or judicial proceeding, your attorney can provide you with legal representation in court.