Acceleration Clause

Bruno Simpson Last Updated Dec 28, 2019 (0) comment ,

Acceleration Clause

What Is the Acceleration Clause?

Acceleration clause….what is it?  In short, these are the reasons a lender can demand a borrower to repay all of an outstanding loan.

Also known as the acceleration covenant, this clause is located in your loan agreement with your lender. The clause outlines the conditions where the lender may demand you to pay the entire loan back outside of the standard monthly terms.

Acceleration does not happen automatically. Once the conditions are met, the lender must physically activate the clause. So even if the lender has grounds to invoke the acceleration clause, they may not do so immediately, giving you time to catch up on your payments, for example.

The most common condition for acceleration is because of extreme payment delinquency. However, there could be severe cases of acceleration after only one missed payment.

Other situations that may invoke the clause is if you sell or transfer your property to another party. Your contract may have a due-on-sale or due-on-transfer provision. In other words, since the lender made the loan agreement with you, they have the right to insist that you must own the property with the loan. If you sell or transfer the property, you can be in breach of contract, which may trigger this clause.

Additionally, although uncommon, the acceleration clause can be invoked if you cancel your homeowners’ insurance or fail to pay your property taxes.

Be sure to read the terms of your loan carefully to understand what conditions can grant the lender grounds to apply acceleration.

 

Purpose of the Acceleration Clause

The acceleration clause is intended to protect the lender from borrower default. If the borrower has a particular number of delinquent payments or breaches the contract, the lender may choose to invoke the acceleration clause.

The lender would then alleviate potential losses due to non-payment and have greater control over the collateral or property. In most cases, the bank or financial institution likely believes that by invoking the clause after several missed payments, the borrower will not be able to pay the outstanding balance. Therefore, this allows the bank to foreclose on the home and mitigate losses through a resale.

 

Here’s a Clause Example

Claire purchases a home for $100,000. She makes her monthly payments and has paid $40,000 of her $100,000 loan. If she fulfills the loan, she’ll be the complete owner of the house.

Unfortunately, Claire has missed three months of payment. The bank chooses to invoke the acceleration clause and is now required to pay the remaining $60,000 in one shot. If she fails to pay the rest of the loan, Claire would be in breach of contract and will lose the house.

If Claire cannot pay the remaining $60,000, the bank can start the foreclosure process. Once they own the land, they can resell it and at the minimum, make back the $60,000.

The acceleration clause are the reasons a lender can demand a borrower to repay all of an outstanding loan.

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