What Is an Acceleration Clause in a Loan Contract?

Acceleration Clause Explained

Worried couple reading a letter at home
•••

Milos Dimic / Getty Images

An acceleration clause is often part of a loan contract, and it allows a lender to require you to immediately repay all of your outstanding loan balance if you don’t meet certain conditions. A lender may take advantage of this clause if you miss too many payments or breach the contract in some other way.

Below, we’ll take a closer look at what an acceleration clause is, how it works, and when it could come into play with a loan.

Definition and Examples of an Acceleration Clause

An acceleration clause may show up in a loan agreement or contract when the lender wants to ensure repayment of the money. For example, it is often found in mortgages and requires borrowers to repay their outstanding mortgage balance if they fail to meet the requirements defined in their contract. If your lender invokes the acceleration clause, you’ll have to pay back your home loan right away or before your loan term is up.

Since mortgages are often hundreds of thousands of dollars, this clause protects lenders when borrowers miss payments or break other stipulations. It can also help lenders avoid the costly process of foreclosure.

While acceleration clauses often show up in loan agreements or contracts, such as for a mortgage, you may also find one in a lease agreement if you rent your home.

How an Acceleration Clause Works

Acceleration clauses vary from lender to lender. In most cases, however, they may be initiated if you miss too many payments, file for bankruptcy, cancel your home insurance, don’t pay your property taxes, or fail to keep your home in livable condition. It’s important to note these clauses rarely go into effect automatically. Lenders can decide whether or not they’d like to use them. 

Often, mortgages include acceleration clauses known as “due-on-sale” clauses to protect a lender in the event you transfer the rights to the property. If you do so without getting written consent from your lender in advance, you may face this clause.

Your lender does not have the right to use the acceleration clause if you transfer the interest in your property to one of your heirs.

For example, let’s say you have $150,000 left on your mortgage. Unfortunately, you lose your job. You miss several monthly mortgage payments, which include your property taxes and home insurance. As a result, your mortgage lender decides to initiate the acceleration clause in your contract. You’re now required to repay your entire mortgage balance—$150,000—immediately. If you don’t, your home may go into pre-foreclosure.

What To Do if Your Lender Invokes an Acceleration Clause

If your lender decides to exercise the acceleration clause in your loan agreement, they’ll likely notify you, stating the reason for the acceleration, your mortgage balance, plus any unpaid interest and the payment due date.

Having a lender invoke an acceleration clause can be nerveracking, especially if you don’t have enough cash on hand to pay off your loan. The good news is there are a few options at your disposal.

Acceleration and foreclosure laws vary from state to state, so be sure to check out your state’s specific laws.

Loan Modification

A loan modification is when you can restructure your loan and make your payments more affordable. It may be the best option if you feel confident you can repay your loan over time with smaller monthly payments.

Mortgage Reinstatement

Your lender may ask you if you’d like to reinstate your mortgage to avoid foreclosure. This will outline how much you owe in order to catch up on your payments and applicable fees.

Pre-foreclosure

If you’re unable to repay the loan, even with a payment plan, you’ll go into pre-foreclosure. This is when you can get up to speed on your payments, refinance, or move forward with a short sale. As long as you have equity in your home (the difference between your mortgage balance and home value), refinancing may be a good option to consider.

Key Takeaways

  • An acceleration clause in a loan contract gives a lender the right to accelerate your loan repayment if you fail to meet certain conditions.
  • Acceleration clauses are common in mortgage loans.
  • Missing mortgage payments, filing for bankruptcy, canceling your home insurance, and more are some of the reasons why your lender may invoke an acceleration clause.
  • If your lender invokes the acceleration clause, you may want to consider loan modification, mortgage reinstatement, or the pre-foreclosure process.