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If you miss a single mortgage payment, very few lenders will take action (besides maybe a late fee). But if you’re more than a few months behind, they might eventually begin trying to claim the equity in your home. This process can be made more complicated by a real estate acceleration clause, which is featured in several types of mortgages.
An acceleration clause in a loan agreement enables the lender to demand that you immediately pay what you owe on your mortgage loan. In this article, we’ll discuss the most important things to know about acceleration clauses, including how they might affect your home ownership status.
What Is an Acceleration Clause?
All mortgages – even those issued to people with incredible credit scores and significant assets – have terms that enable the lender to collect on at least part of a home’s equity in the event mortgage payments are missed. When you signed for a mortgage, you made a promise to pay the lender back at an agreed-upon rate in monthly installments.
Mortgage lenders tend to avoid immediate foreclosure – not only does foreclosure cause people to lose their homes, but the entire process can be very expensive. However, if there are clear, unresolved problems with loan repayment, such as a borrower default, lenders might decide that foreclosure is worth the cost.
An acceleration clause in a mortgage allows the lender to demand full repayment of the loan if certain conditions have not been met. Understanding the triggers and conditions attached to this clause can help you avoid potential foreclosure.
What Triggers an Acceleration Clause?
Several events can potentially trigger the use of an acceleration clause. The most common event, as you might expect, is that people simply stop paying their mortgages.
Most mortgages have a grace period that allows borrowers to pay a few days late before facing any real consequences. After that (usually about 15 days), the lender will likely apply a late fee to the mortgage.
After 30 days, the lender might apply an additional fee or report the late payment to the credit bureaus. If the mortgage remains unpaid and multiple payments have been missed (you can usually miss 3 – 4 mortgage payments), the acceleration clause might be triggered.
In addition to failing to pay your mortgage on time, other factors can trigger the acceleration clause, as well. While these payments are usually included in your monthly mortgage payment, failing to renew your homeowner’s insurance or pay property taxes could also cause the clause to be triggered.
Furthermore, other issues – such as failure to maintain the value of your home by keeping it in a livable condition – and personal financial problems, like declaring bankruptcy, can also be problematic.
In most cases, it’s unlikely the acceleration clause will be triggered without at least some sort of warning from your lender. In some states, this warning is required. Nevertheless, it’s important to make sure you’re up to date with each of your mortgage obligations to avoid any issues.
What Are Your Options After a Payment Acceleration?
If your mortgage lender recently notified you about utilizing your acceleration clause, start by taking a deep breath – you haven’t lost your home yet and likely still have options available. Lenders have a strong economic incentive to maintain your mortgage and will likely be willing to find a mutually beneficial solution.
In many cases, you might be able to modify your outstanding mortgage loan. There are several components of your mortgage that your lender could modify, including your monthly payment, the interest rate and the current distribution of equity.
Giving up some of your home’s equity in exchange for a lower monthly payment can help you secure your current living situation while also making your mortgage more manageable.
The loan modification solution that’s right for you will depend on your current financial needs. And we cannot emphasize this point enough – if you’re having problems paying your mortgage, talk to your lender and see which options are currently available.
Forbearance is a common adjustment made to mortgages that can benefit both the lender and the borrower. Entering mortgage forbearance creates a temporary pause on the collection of your mortgage payments, allowing you some time to build up your savings.
Of course, forbearance isn’t free. The process will typically create future financial obligations, such as needing to pay more money. Nevertheless, it’s often a reasonable option for people who are suddenly experiencing significant financial hardships, such as losing a job, sudden medical problems and other unexpected expenses.
Refinancing your loan is similar to modifying your loan, but the terms of the loan will change even more. When you refinance, you effectively pay off your existing loan amount in exchange for establishing a new one.
Most mortgage lenders offer refinancing options to their existing clients, though the refinancing process will usually carry some significant costs.
Some of the most common reasons for refinancing a home loan include securing a lower interest rate, accessing the equity in your home and potentially avoiding foreclosure (the result of acceleration). Refinancing is one of the easiest ways to get a large cash payment from your lender.
Foreclosure is a legal process that can take a considerable amount of time, often several months. In some cases, you might end up losing your home. However, there are many opportunities where you’ll be able to intervene and avoid foreclosure altogether.
The pre-foreclosure process begins before legal foreclosure proceedings. When the pre-foreclosure period starts, you’ve likely already entered default as the result of violating the terms of your mortgage (usually, missing payments). At this point, it will typically be several months – even years – before you’re kicked out of your home.
The best way to “exit” pre-foreclosure is to make however many mortgage payments you need for your loan to be current. If you’re currently unable to do so, you might want to consider borrowing from an outside lender (though your interest rates will be higher).
A short sale, while usually undesirable, is another strategy to prevent a lender from claiming all outstanding equity on a home.
With a short sale, the lender sells the home to another buyer at a discounted rate, allowing you to maintain a larger portion of your home’s equity. While this does mean you’ll eventually need to leave your home, it’s a good option in certain situations.
Get Back on Track Before It’s Too Late
You might not be a big fan of your current lender – many people aren’t. But you and your lender have something in common: both parties want to extend the life of your mortgage and have you catch up with your payments.
An acceleration notice doesn’t mean you’re getting kicked out of your home. Just be sure to catch up with your payments as soon as you can, talk to your lender and find a viable path forward.
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