Acceleration Clause
Definition of "Acceleration Clause"
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.
Accelerate your home buying/home selling process: find a real estate agent
Popular Mortgage Terms
Interest from the day of closing to the first day of the following month. To simplify the task of loan administration, the accounting for all home loans begins as if the loan was closed ...
Belief that there is a special way to pay down the balance of a home mortgage faster, if you know the secret. ...
The portion of the monthly payment that is used to reduce the loan balance. ...
Prices that assume a more or less standardized set of transaction characteristics that generally command the lowest prices. Generic prices are distinguished from transaction specific ...
During the great depression of the 1930s, the government stepped in and came with an innovative loan to help the banking industry recover, thus putting the whole economy back on track. FHA ...
The period you must retain a mortgage in order for it to be profitable to pay points to reduce the rate. ...
A transaction in which interest is not paid on interest there is no compounding. For example, if you deposit $1,000 in an account that pays 5% a year simple interest, you would receive ...
Employees of lenders or mortgage brokers who find borrowers, sell and counsel them, and take applications. Loan officers employed by mortgage brokers may also be involved in loan ...
The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house. Construction can be financed in two ways. One way is to use two ...
Comments for Acceleration Clause
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 12:56:56Gary,
Apr 13, 2018 11:21:59from 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.
Have a question or comment?
We're here to help.