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July 4th, 2022 at 11:00 am

What is an acceleration clause in real estate?

Acceleration is a word we generally associate with speed. You hit the accelerator of your car and take off, adrenaline flowing, heart pumping, as you start flying down the open road.

An acceleration clause in real estate may also get your adrenaline flowing and heart pumping, but for different reasons.

So what is this acceleration clause real estate? At its most basic level, it’s a part of your mortgage that allows your lender to call in the entirety of the loan. Unlike amortization in real estate, that means you have to pay everything now. Thankfully, there’s a bit more complexity and lenders can’t just trigger an acceleration clause on a whim. Let’s look at some of the details of how mortgage acceleration clauses in real estate work.

How does an acceleration clause work?

To understand how acceleration clauses work, let’s start by looking at how a mortgage works. When you get a mortgage, there’s more to it than simply walking into a bank and leaving with a large sum of money that you promise to pay back. Instead, you and your lender have to agree to a number of terms detailed in a mortgage contract before you can take out the mortgage loan.

These all exist in your promissory note, which outlines how the loan will work. In a promissory note, you might find:

That’s a lot of information and, in your rush to secure your mortgage, you may be focused solely on the amount of the loan, the length of time you have to pay it back, and the interest payment. These are all important elements, but there’s more you need to pay attention to in the terms of the loan because it’s when these terms are broken that your lender can invoke the acceleration clause and demand repayment of the loan.

Do all loans have an acceleration clause?

Probably.

In theory, a loan doesn’t have to have an acceleration clause. In practice, when you’re dealing with loans the size of your typical mortgage you can expect to find one. It’s a standard way lenders use to mitigate their risk from home buyers. However, the good news is that there are many reasons lenders will avoid actually using this clause (which we’ll get into a little later).

What might trigger an acceleration clause?

So what could cause an acceleration clause to be triggered? As we mentioned earlier, all of the reasons for triggering an acceleration clause will be spelled out in the promissory note of your mortgage, but there are certain standard scenarios you can expect:

Reasons lenders won’t trigger the clause

So does all this mean that you need to be constantly on edge, worried that your lender will trigger their acceleration clause at any minor infraction and you’ll lose your house? 

Probably not.

While acceleration clauses are to be taken seriously, there are compelling reasons your bank will try to avoid exercising this clause. They include:

How to avoid an acceleration clause

While you likely won’t be able to take out a mortgage that doesn’t include an acceleration clause, there are steps you can take to ensure that your lender doesn’t use the clause. They include:

What happens when the clause is triggered?

Despite all the reasons your lender has to try to work things out with you instead of triggering the acceleration clause, there are still times when they may decide to call in your loan. If this happens, you will receive a letter in the mail. This letter will inform you that your lender is using the acceleration clause. It will also include other important information:

The next steps for you may be determined by what state you live in. While you can always talk to your lender and see what options they will give you for repayment, certain states also have protections that can help keep you in your house.

For instance, in California, you have time (up to five days before your house is sold into foreclosure) to repay what you owe and stay in your house. This is known as mortgage reinstatement. To reinstate your mortgage, you will need to pay:

There are also assistance programs in many states that may help you pay back what you owe. As both these programs and the terms for reinstatement vary from state to state, it’s worth looking into your state’s laws to know what options are available to you.

Acceleration vs. escalation

Another clause that often gets confused for an acceleration clause is an escalation clause. But while the names may be similar, the two clauses are very different. While an acceleration clause is a tool used by lenders to mitigate the risk of a loan, an escalation clause is used by buyers when trying to secure a winning bid on a property.

With an escalation clause, buyers agree that they will up their bid on a property if another, higher offer is made. This can be useful in a few scenarios:

There are also scenarios where an escalation clause will not be appropriate, like if you can’t reasonably extend your offer because of your budget. Whether an escalation clause is right for you is something you should discuss with your agent before submitting an offer

Regardless, do not confuse an acceleration clause with an escalation clause. They are completely different.

Understanding home buying with Berkshire Hathaway

Buying a house is complicated. Whether it’s fully understanding your mortgage or fully understanding how to make the most attractive bid to a seller, there are terms and ways of going about things that you may not be familiar with. That’s why there’s no substitute for having a qualified, dedicated real estate agent working with you and guiding you through the process. If you’re also wondering “what is a bridge loan?,” or “what is a contingency sale?” we’ve got you covered!

At California Properties, we want to be informed. Maybe you’re just starting your search and want access to our newsletter that includes tips and exclusive listings. Maybe you’re ready to find your new home. No matter where you are in your journey, we’re here to help you find everything you’re looking for.

Sources: LA Times, US News and World Report, SF Gate, SF Gate, US News and World Report

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