Definition
An acceleration clause is a provision in a mortgage or loan agreement that allows the lender to require the borrower to repay the entire remaining balance immediately if specific conditions are met. This clause is typically triggered when the borrower defaults on payments, violates loan terms, or transfers ownership of the property without lender approval.
Explanation
The acceleration clause is designed to protect lenders by enabling them to recover funds quickly in case of a default. Common triggers for this clause include:
✅ Missed Payments: If a borrower falls behind on mortgage payments, the lender can activate the clause.
✅ Violation of Terms: Breaching terms such as failing to insure the property or unauthorized property transfers can trigger acceleration.
✅ Due-on-Sale Clause: If the property is sold or transferred without the lender’s consent, the clause may require immediate repayment.
Once triggered, the lender sends a notice of acceleration informing the borrower of the remaining balance due and a deadline for payment. If the borrower cannot repay, foreclosure proceedings may begin.
Pros and Cons of Acceleration Clauses
✅ Advantages:
- Protects lenders from prolonged financial risk.
- Encourages borrowers to adhere strictly to loan terms.
❌ Disadvantages:
- Can lead to foreclosure if the borrower is unable to repay the accelerated amount.
- Limits borrower flexibility in property transfers.
Example
A homeowner with a $250,000 mortgage misses several payments. The lender invokes the acceleration clause, demanding the full remaining balance of $240,000 within 30 days. Unable to repay, the homeowner faces foreclosure unless they can negotiate a solution with the lender.