A term in a loan agreement that requires the borrower to pay off the loan immediately under certain conditions.
Acceleration clauses: an overview
- Interest and payment
- Invoking acceleration clauses
- Transfer and sale
- Home mortgages
- Related topics
- Additional sources
Acceleration clauses are terms in loan agreements that require the borrower to pay off the loan immediately if certain conditions are met. For example, most home [[wex:mortgage|mortgages]] have an acceleration clause that is triggered if the borrower misses too many payments. Acceleration clauses most often appear in [[wex:mortgage|mortgages]], both residential and commercial. They also appear in some leases.
Interest and payment
When a lender invokes an acceleration clause, the borrower must immediately pay the unpaid balance of the loan’s principal, as well as any interest that accumulated before the lender invoked the acceleration clause. The borrower does not, however, have to pay the full amount of interest that would have come due had the loan been paid off normally. For example, most loans allow the borrower to accelerate the loan and pay off the loan early in a single lump sum to avoid paying interest for the remainder of the loan’s term.
Invoking acceleration clauses
Few acceleration clauses trigger automatically. Instead, after the conditions in the clause occur, the lender may choose whether or not to invoke the clause. Where a lender gains the right to invoke an acceleration clause due to a borrower’s [[wex:default]], the lender may lose that right if the borrower corrects his or her [[wex:default]] before the lender actually invokes the clause. In cases involving defaults for failing to make timely payments, [[wex:tender]] is usually just as effective as actual payment at preventing the lender from invoking an acceleration clause.
Transfer and sale
Some [[wex:mortgage|mortgages]] have clauses that allow acceleration if the borrower sells or transfers the [[wex:mortgage|mortgaged]] [[wex:real_property|property]]. These clauses are intended to protect the lender’s [[wex:secured_transactions|security interest]] in the [[wex:mortgage|mortgaged]] [[wex:real_property|property]]. Accordingly, some of these “due-on-sale” and “due-on-transfer” clauses only allow acceleration if the sale or transfer would impair the lender’s security interest, or if the borrower fails to get the lender’s consent in advance. These types of clauses may not be triggered if property ownership transfers because the borrower died and the property passed to his heirs. Due-on-sale and due-on-transfer clauses are regulated by the federal Garn-St. Germain Depository Institutions Act of 1982. [[USC:12:1701j-3#content|12 U.S.C. § 1701j-3(b)(1)]]. The act only affects [[wex:mortgage|mortgages]] of [[wex:real_property|real property]].
Parties may waive their rights to invoke acceleration clauses by either express agreement or by inducing others to [[wex:reliance|detrimentally rely]] on their behavior.
Home [[wex:mortgage|mortgages’]] acceleration clauses are designed to trigger in situations where the [[wex:mortgage|mortgagee]] might want to [[wex:foreclosure|foreclose]] on the [[wex:mortgage|mortgage]]. This allows the [[wex:mortgagee|mortgagee]] to attempt to recover the entire unpaid value of the [[wex:mortgage|mortgage]], not just the value of a few missed payments.
In some jurisdictions, borrowers in this situation may undo [[wex:mortgagee|mortgagees’]] invocation of acceleration clauses and avoid [[wex:foreclosure|foreclosure]] by making-up past-due payments and compensating the [[wex:mortgagee|mortgagee]] for some or all of the costs associated with the borrower’s [[wex:default]]. In most of these jurisdictions, the key idea is that the borrower must put the mortgagor in the position it would have been in but for the borrower’s [[wex:default]].
Home [[wex:mortgage|mortgages]] often include acceleration clauses that are triggered by failure to make regular payments, attempts to sell or transfer the land, failure to pay [[wex:property_tax|property taxes]], failure to maintain proper [[wex:insurance]] on the property, and failure to make payments on a separate [[wex:mortgage]] on the same [[wex:real_property|property]].
- [[wex:debtor_and_creditor|Debtor and Creditor Law]]
- [[wex:Mortgage|Mortgage Law Overview]]
- [[wex:table_property|State Property Statutes]]