Understanding Mortgage Acceleration: When Can Banks Demand Immediate Repayment?

When banks call in a mortgage that is due, the term they often use is "acceleration." This means that the balance of the loan becomes due immediately. While this could spell financial disaster to a borrower, it occurs only in rare or extreme cases. Generally, a mortgage acceleration happens because of something the borrower has done.

Bank Failure

You may have a vision of your mortgage lender failing and the sheriff arriving at your door saying that the new bank that purchased your mortgage wants payment in full immediately. While this would make for good television drama, it is not the way the process happens. Your mortgage is a financial instrument that can be sold to another bank or investor. The FDIC may retain it temporarily, but it will send you instructions within a few days about where to send your payments.

Default on Payments

Most loan agreements contain an acceleration clause for default on payments. This means that if you are late on a payment by a specified length of time, the lender can accelerate the mortgage or demand that you pay the entire principal and any interest due immediately. The lender usually does this because it wants to foreclose on the home. If a default is minor, the lender probably will seek to work out an arrangement with you to catch up on the payments.

Home Sale

Most home mortgages allow the lender to accelerate or call the note due immediately if you sell your home. This prevents anyone else from assuming the mortgage payments and just taking title to the home. These mortgage assumptions were common at one time but are used less frequently today. When you sell a home, the buyer pays you and you then have funds available to pay the mortgage off; acceleration in this case doesn't really matter.

Unpaid Taxes

Some mortgage notes have language in them that allows the lender to accelerate the mortgage if the case of unpaid property taxes. This would happen if your local taxing authority files a tax lien against the property. Tax liens are public record, so when the mortgage bank finds out about the lien, it could accelerate the mortgage to proceed with a foreclosure.

Acceleration on Demand

Remember, very few mortgage loans contain a clause allowing for acceleration of the loan unless the borrower does something. Generally, the lender cannot decide to call in a loan at random. A borrower likely would avoid a mortgage agreement that would give the lender such power. This type of acceleration clause is more common in a commercial loan.