If a mortgage exists, odds are it includes an acceleration clause. The clause requires a borrower to repay all of an outstanding loan if upon a breach of the contract.
A clause identifies a particular section of a real estate contract (for those of you who don’t know). There are many types of clauses in real estate, and you are likely to see many of them on your real estate exam.
What is the Acceleration Clause?
Definition: The acceleration clause is a contract provision that requires a borrower to repay all of an outstanding loan if upon a breach of the contract.
This means that if a borrower breaks any terms of their mortgage, the lender can demand an “accelerated” payment. In other words, rather than paying the loan in monthly payments over 15 to 30 like your typical mortgage, the whole amount is due instantly.
What Triggers an Acceleration Clause in a Loan Agreement?
Every acceleration clause outlines the reasons that the lender can demand loan repayment. The most common cause would be a lack of paying off the loan. But there are some more unconditional triggers, like maybe not keeping current with your home insurance. Perhaps not paying property taxes or, in some situations neglecting to keep the home in good condition.
If a borrower can’t pay the accelerated payment, the lender will proceed to the next step: foreclosure.
Of course, conclusively, I must mention, every real estate contract is different, and mortgages are no exception. So keep in mind some acceleration clauses may look different than others.
What to Know for the Real Estate Exam
What’s important to understand for the real estate exam is like other clauses, you need to remember what the acceleration clause is.
Remember, the acceleration clause is what ensures a borrower to repay all of an outstanding loan if upon a breach of the contract.
A question on the exam you might see is a list of different contract clauses, and you may need to distinguish which-is-which.