Acceleration Clauses

Acceleration clauses have nothing to do with sports cars. Instead, they act as a hammer in any contractual situation, giving one party the ability to nail the other.

Acceleration Clauses

Acceleration clauses are terms that are strictly legally based and relate to the law of contracts. Acceleration clauses included in a contract, such as the purchase of a home or mortgage, act to force a party to act immediately. This occurs where one party breaches the contract and the full amount comes due within a short time of the breach. You are often given a small time period, say 10 days, to cure the breach.

In the sale of a home, acceleration clauses are typically tied into the timing of escrow. A party can try to require the other to take certain action or be in breach. In most states, this approach is frowned upon and acceleration clauses are not allowed. In such a situation, the alternative is for the seller to demand an earnest money deposit from the buyer. When the buyer fails to take the steps to close escrow, the deposit is forfeited to the seller. The deposit amount is arrived at through negotiation.

Acceleration clauses occur more frequently in mortgage loans. Assume that a party received a mortgage from a lender where they would owe $2,500 a month for 30 years. The party could make the payments for 20 years all on time and in responsible fashion, but a missed payment can result in a breach of contract. This breach of contract will lead to the acceleration clause which will cause the remaining amount of the loan due immediately rather than the monthly installments that was agreed to previously. Typically, acceleration clauses only occur after a few missed payments and you have a set time period to catch up with the payments and keep the mortgage. The specific terms, however, are spelled out in your mortgage so make sure to review it.

Make no mistake, acceleration clauses are used as a punishing hammer in contracts. It is rare to see them in purchase agreements for homes, so make sure to negotiate them out if the other party tries to submit them. As to mortgages, accelerate clauses are the norm and there isn't much you can do about them.

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