What is an Acceleration Clause?

When a mortgage is used to purchase a new home or a piece of property, there is a good chance that the mortgage agreement will include an acceleration clause. Essentially, the acceleration clause is a statement or series of statements within the mortgage contract that outlines a number of reasons that will allow the lender to demand payment of the outstanding balance of the loan. Here are some basics about the acceleration clause, and how the inclusion of the clause can help to protect the lender in the event of a number of scenarios.

Acceleration clauses help to define the terms of the loan covenant. There are a number of terms that can be included in an acceleration clause. For example, the loan covenants may prohibit the buyer from reselling the property without the express permission of the lender. This ensures that the lender is able to secure payment of the outstanding balance in the event that the borrower wishes to end the business relationship. Another example of terms that are commonly found in an acceleration clause is the disposition of the collateral used to secure the loan. Prohibiting the sale of collateral for the duration of the loan also helps to make sure there is some sort of assets to collect in the event that the borrower defaults in some manner.

The acceleration clause can also be used to spell out some of the common terms of compliance of the loan, while outlining the consequences that will ensue if the terms are not honored. As an example, the acceleration clause may specify the due date of the payments, and also include a list of steps the lender will take in order to penalize the borrower for late payments or failure to pay at all. This may include the application of a fixed amount if the payment is not paid within a specified time after the due date, all the way through termination of the loan and demand for full payment.

Before signing any type of loan or mortgage agreement, it is always a good idea to look through the agreement and read all points addressed in the acceleration clause. While the majority of agreements contain very reasonable terms within the acceleration clause, it is important for the borrower to check for any points that may be an issue down the road. Failure to read the document before signing will not free the borrower from the responsibility to abide by the acceleration clause or deal with the terms of recourse that are afforded to the lender.