Acceleration Clause


Definition of "Acceleration Clause"

Thomas  Eason real estate agent
Thomas Eason, Real Estate Agent RE/MAX AEROSPACE

Acceleration Clause is a contractual provision inserted in a mortgage, a bond, a deed of trust or other credit vehicles, that gives the lender the right to demand repayment of the entire loan balance. Usually, such a clause becomes operational when there has been a default in payments of interest or principal or both.

When the acceleration clause is activated, the entire principal sum is called in and becomes due and payable. This fact would precipitate a foreclosure in the case of real estate, or bankruptcy action if the monies were not paid at the time of the call.

Acceleration clauses are created to protect the lender from borrower default and other risks. It prevents/deals with payment delinquencies, but can, on rare occasions, be structured for other occurrences too.

Let's see an acceleration clause in effect scenario:

Home Seller Barbara makes a Land Contract with Home Buyer Paul. He started paying correctly and living in Barbara's former house. He has paid already $30,000 of its $100,000 contract. At the end of it, he'll be the owner of the house. BUT: he didn't pay for the last 3 months, so the acceleration clause kicked in, Barbara filed for a land contract forfeiture and now Paul has to pay the rest of the $70,000 with one swing if he wants to still be able to get the house. Or else, they're done.

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Comments for Acceleration Clause


Gary Kuess Gary Kuess said:

Selling a property on Land Contract and using an Acceleration Clause if the buyer doesn't keep the property in good condition. Is this possible?

Apr 08, 2018  12:56:56

 
Real Estate Agent

Gary,

from our understanding, no.

Acceleration Clauses were created with a strictly financial goal in mind: to prevent payment delinquency.  If you have already signed the Land Contract and there was this provision of using the acceleration clause if the property is not in good condition, a Judge could easily favor the buyer saying that the house will be his/hers once payments are completed, so it's not done in bad faith and it will be his/her problem if the house is in bad shape.

If you're haven't signed the land contract yet and is wondering if it's possible to put an acceleration clause if the buyer doesn't keep the property in good condition... we recommend you contact a Real Estate Lawyer and get his/her opinion on it to see if this would fly or if it's ilegal or just a waste of time.  If the worrying is the buyer defaulting and leaving the house in bad shape undervaluing its market price, we recommend to have it in the contract a great homeowner's insurance policy instead.


Apr 13, 2018  11:21:59
 

 

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