If you’re having trouble keeping up with your mortgage payments or some other obligation of your mortgage , you may have received a letter stating that you now owe the entire amount you borrowed. The letter might say you owe your full mortgage balance by a date that can vary depending on where you live. This process is initiated because of something called the mortgage acceleration clause.
Don’t panic – often, you can restore your mortgage by developing a plan to catch up with your monthly payments. Here’s what you need to know about your mortgage’s acceleration clause.
An acceleration clause is a provision in your mortgage agreement that defines when and how the lender can “accelerate” the full repayment of the loan. If a homeowner fails to fulfill the terms of their mortgage agreement, they’ll receive an acceleration letter notifying them that the lender has triggered the acceleration clause.
In other words, it accelerates the repayment of what you borrowed plus the interest that accrues after the clause is triggered until full loan repayment occurs.
Acceleration clauses are legal. When and how they can be enforced will be defined in your mortgage contract.
Additionally, mortgage acceleration and foreclosure laws vary greatly depending on the state you live in, so be sure to check your state’s laws regarding loan acceleration.
If you have any questions about the legality of the acceleration clause in your mortgage contract, speak to the attorney who handled your closing. They should have reviewed it at that time and will be able to explain what your legal options are based on where you live. If you didn’t have an attorney present, speak to your mortgage lender.
There are several things that could activate an acceleration clause in your loan agreement. Let’s take a look at some of the situations that could prompt a mortgage acceleration clause.
Most commonly, lenders exercise the clause when borrowers become delinquent on their mortgage payments . The conditions under which your loan can be accelerated for nonpayment are defined in your contract and you have rights under federal law. Lenders typically won’t foreclose for nonpayment until you’re at least 120 days late.
Moreover, if this is happening, your mortgage servicer will likely reach out to you to see if they can help. The goal is to keep you in your home, but also to ensure you’re making your monthly payments on time.
The acceleration clause can also be triggered if you cancel your homeowners insurance policy . Your lender will require you to maintain homeowners insurance so that the property can be repaired if it’s damaged to restore its market value. The lender has to be sure the home is in sellable condition in case you ever default on the mortgage .
In practice, lenders, including Rocket Mortgage ® , often buy insurance for you and make you pay for it (called “force-placed insurance”) if you cancel or lose your home insurance. But they also have the option to accelerate your mortgage.
Lenders will typically reserve the right to accelerate your mortgage if you miss a payment toward your property taxes . If you don’t pay property taxes, your local government can place a lien on your property and eventually seize it altogether.
In this situation, your mortgage lender will usually pay the taxes for you. They’ll likely make you go back on an escrow account to ensure that your property taxes and homeowners insurance are paid for. These payments will be rolled into your monthly mortgage payment. You’ll owe the back payments to your lender.
Your servicer can call your loan due if your property is damaged or destroyed because your home is collateral for your mortgage. This doesn’t mean they’re going to make you pay back your loan immediately following a major storm. It does mean you have to work with your lender and your insurance to have the damage fixed or rebuild.
Filing for bankruptcy could also trigger the acceleration clause in your mortgage agreement. That’s because your bankruptcy can affect your lender’s ability to exercise its rights if you default on the home loan.
The primary mortgage lender holds a superior position to all other creditors on the real estate purchased with the loan and secured with a mortgage. The bankruptcy court’s primacy in determining creditor payouts can put this agreement in jeopardy. That’s why a lender can call in your entire loan should you declare bankruptcy.
As a practical matter, lenders like Rocket Mortgage often only foreclose if you stop making your payments or fail to make the agreed-upon payments under a Chapter 12 or 13 reorganization bankruptcy. If you do miss your payments, your lender can file for a stay of the bankruptcy and initiate foreclosure proceedings upon approval.
Finally, an acceleration may be triggered if you attempt to transfer the property to another person or an LLC without your lender’s prior permission. Your mortgage contains a due-on-sale clause – also known as an alienation clause – which is violated by any transfer of property, in turn triggering a mortgage acceleration.
For example, let’s say you transfer ownership of your home from your personal ownership to your business. Your mortgage lender may immediately send you a mortgage acceleration notice. That’s because your lender vetted you, not your business, when it made the loan.
There’s an exception by Rocket Mortgage for conventional loans originated after June 1, 2016, and transferred to an LLC. If the client controls more than 50% of the LLC under a K-1 or Articles of Organization, these are permitted.
Additionally, during a client’s lifetime, certain family members may take over the property while assuming the loan. These include children and spouses. After a client passes, successors in interest may take over payments without triggering an acceleration.
There are other instances in which a title transfer is permitted, but your servicer may require additional information from you and/or the person you’re transferring the title to. Make contact with them prior to making any changes.
If your lender starts an acceleration clause, you’ll receive a letter in the mail. It should include the reason for the mortgage acceleration as well as the lender’s contact information and the mortgage balance with any back interest you owe up to this point.
Typically, the letter will request payment and specify a date by which the payment is due. If you pay back the full balance owed, your loan will be satisfied. Where legally required, the lender will send you paperwork releasing the mortgage lien.
Borrowers may be able to avoid acceleration by working out a loan modification or repayment plan with their lender to make up the delinquent payments. The key is to work through your options with your servicer.
Bear in mind that the borrower may sometimes have to pay some or all of the costs the lender incurred while dealing with the acceleration.
Losing your home in foreclosure is pretty unpleasant to think about, for you and your lender. Because lenders prefer not to own real estate, there are usually a variety of options available for borrowers to choose from to get back to being current on their loan payments.
This won’t work if the reason for your pending acceleration has to do with missed payments because they have a significant impact on your ability to qualify. But if your mortgage is being called due for another reason, you may be able to pay it off by refinancing.
If you have adequate equity in your home, you may be able to refinance to significantly reduce your monthly payments. Use the Rocket Mortgage refinance calculator to see how your monthly payments could change.
As a homeowner, you may have a few refinance options to choose from. Let’s go over two of the most common to determine which could be right for your situation.
By applying for a rate-and-term refinance, you could trade in a high monthly mortgage payment for a much lower one. Of course, this often depends on the length of the loan term and current interest rates. For example, if you currently have a 15-year fixed-rate mortgage and you opted to refinance to a 30-year fixed-rate mortgage, your monthly burden would lighten significantly.
If you’ve suddenly lost an income, you might not realize how much cash you’ve accumulated in the form of home equity. A cash-out refinance can put that cash to work. If you need a cushion while you look for a new job or business opportunity, and you have sufficient equity, you may be able to take a substantial sum out of your home that can see you through.
In a cash-out refinance, you’re taking out a bigger loan, so it’s important to make sure this will help you accomplish your financial goals and that you can handle the payments before moving forward, particularly if taking one out to handle a loan acceleration.
If you’re falling behind on your mortgage payments and aren’t currently in a position to pay back what you owe, you should talk to your lender immediately about whether you qualify for mortgage forbearance . A forbearance temporarily pauses or reduces your mortgage payments. Payments missed at this time are due after the forbearance plan ends.
Your servicer will attempt to qualify you for one of several options to make up past-due payments and stay in your home, including repayment plans, deferral or partial claim, loan modification or reinstatement. If this isn’t possible, your servicer will look at a couple of options to help you with a graceful exit.
If you’re behind on your mortgage payments and don’t know if you’ll be able to repay what you owe, your lender may propose that you sign a deed in lieu of foreclosure . This arrangement will transfer ownership of your home to the lender and allow you to avoid having a foreclosure on your credit history.
Lenders often prefer deeds in lieu of foreclosure over having to enter the foreclosure process because it can be quicker and less expensive.
However, if your home’s sale doesn’t cover the balance of what you owe on the mortgage, it’s possible that the lender could sue to recoup its losses.
In a short sale , the homeowner in default finds a buyer for the property who is willing to pay less than what the homeowner owes on the mortgage. To complete the sale, the owner must seek lender approval. As long as the lender has a lien on the property, the owner can’t sell it.
Lenders generally approve short sales if the property is no longer worth what it was when the mortgage originated, and the homeowner can show that they’re experiencing financial hardship.