The Acceleration Clause

 

The Acceleration Clause that we are talking about today involves the debt that you owe your Lender on the real estate that you purchased.

If you try to research “Acceleration Clause” on the internet, or listen to it discussed on Podcasts or read about it on Blogs, you will be told that it is what happens when you miss one, two, or three payments on your Real Estate Note or Mortgage.

This is incorrect.

The Acceleration Clause is not triggered by missed payments.

But it is triggered by other things that are happening at the same time as the missed payments, and you need to know what they are, and how the process takes place, and what you can do about it.

THE ACCELERATION CLAUSE CREATION

All Real Estate Investors are operating under an Acceleration Clause, and few understand the circumstances that can trigger it, or what the consequence are when it happens.

So, here’s the deal.

When you finance a real estate transaction, if it is not a cash transaction, the transaction will create a situation where you must borrow money, and now you owe money to the Lender.

The loan amount is paid out over a period of time, with each payment being made up of part interest and part principal, and with the debt being secured by the real estate that you purchased or refinanced.

The transaction will involve you signing certain documents.

The documents might be a Real Estate Note, or Promissory Note, or a Mortgage, or a Deed of Trust, or a Contract.

These documents will contain clauses, and the clauses will explain the terms of the transaction, and the obligations and rights of the two parties.

One or more of the documents will contain clauses in which the occurrence of certain events will trigger the right of the Lender to declare that the entire remaining principal balance of the debt is immediately due and payable, and provide that Foreclosure on the property will result if the debt is not paid within 30 days.

This is the “Acceleration Clause.”

It accelerates the future payments of the obligation into the present time.

HOW THE ACCELERATION CLAUSE WORKS FOR THE LENDER

This clause protects the interests of the Lender.

And that protection might be necessitated by the Borrower doing a number of things.

  • The Borrower has transferred title to the property to someone else, but has not paid off the property’s debt to the Lender.
  • The Borrower has not paid the Property Taxes, and has allowed a Delinquency to exist, which is accruing interest and penalties, and will lead to a Tax Suit.
  • The Borrower has allowed the property insurance coverage to lapse, and the Lender has been required to purchase insurance coverage, for which the Borrower has refused to reimburse the Lender.
  • There has been damage to the property , which has not been repaired, reducing the value of the collateral that is securing the loan.
  • The Borrower has ceased making regular payments, and after being given the legal notices to cure the default, has failed to do so, and the debt has been declared to be in Default.

HOW THE ACCELERATION CLAUSE WORKS FOR THE BORROWER

The Borrower is not without rights and protections in the process.

Both State and Federal statutes outline the procedure that must be followed by the Lender in declaring the entire Principal Balance immediately due and payable, as well as the steps required to foreclose on the property.

The concept of an Acceleration Clause is closely tied to the “due-on-sale clause,” which I describe in another post.

And here’s a tip: when you are in the process of buying a property, check with the Lender to see if the existing financing is current.

You might find that the acceleration clause on the existing financing has already been triggered, and you might get far enough out on that limb during the buying process that it becomes a problem.

Most Buyers never check this.

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DISCLAIMER

I am an Attorney licensed to practice in TexasNorth CarolinaVirginia, and the District of Columbia.  But I am not your Attorney.  I would be honored if I were, but I am not.  Reading this Article does not create an attorney-client relationship between us.  Internet content should not be used as a substitute for the advice of a competent Attorney admitted or authorized to practice law in your state or jurisdiction.

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