When someone wants to purchase a piece of property, they will generally require some form of financial assistance in order to actually purchase the home. Under common circumstances, the prospective purchaser will seek out a lender to loan them the money that is required to purchase the property.
This would generally be a bank or other lending institution. The most common form of a property loan arrangement between a prospective purchaser and a lender is known as a mortgage.
A mortgage is legally defined as a type of security interest attached to property that is paid for with borrowed money. Mortgages are the most common method for financing the purchases of real estate. Mortgagors are the party transferring the interest in land to a mortgagee, which is generally a bank who is providing the loan or other interest in exchange for the security interest in the land.
It is important to note that there are also government sponsored mortgage lenders, such as:
- The United States Department of Veteran Affairs (“VA”);
- The United States Department of Housing and Urban Development (“HUD”); and
- The Federal Housing Administration (“FHA”) which also provides funds to prospective home buyers that qualify for their various programs.
In short, a mortgage allows a prospective property buyer the funds needed to purchase a piece of property. In exchange, that buyer gives the bank an interest in the property that is being purchased. Should the purchaser fail to pay back the money that was loaned to them, the bank will have the interest necessary to foreclose on the loan and sell the property in order to pay off the loan.
Are There Different Types Of Mortgages?
Some examples of the several different types of mortgages that exist include:
- Jumbo Mortgages: A type of loan that exceeds the max loan limits that are set by the Federal Housing Finance Agency (“FHFA”). Jumbo loans are not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. They are most commonly used to finance luxury properties and homes in competitive real estate markets. Jumbo mortgages require adhering to specific requirements, and have specific tax implications as well. The 2022 loan limit set by FHFA is $647,200 for the majority of the United States;
- Two-Step Mortgages: Mortgages involving both fixed rate and adjustable rate mortgages in one mortgage. Two-step mortgages generally begin with a fixed-interest rate, started in an increment of 5, followed by an adjustment resulting in a new fixed-rate for the remaining term of loan. Two-step loans are ideal for those that do not possess good credit;
- Assumable Mortgages: A type of loan arrangement in which an outstanding mortgage, along with its terms, are transferred from the current mortgagor to a prospective buyer. The prospective buyer assumes the previous mortgagor’s debt, and the buyer does not need to obtain their own mortgage. Only certain loans may be assumable, such as USDA, FHA, and VA loans when certain conditions are met;
- Subprime Mortgages: Mortgages given to borrowers with poor credit scores or other such financial challenges. Because the risk of the loan is higher for the lenders, the lender will offset the risk by charging a higher interest rate in order to offer the loan;
- Biweekly Mortgages: A mortgage in which the borrower makes payments every two weeks, for a total of 26 half payments. The result is that 13 full payments are made over a 12 month period. This provides significant savings in terms of the interest that is paid on the loan. However, this payment arrangement is not ideal for a borrower who cannot make frequent payments;
- Balloon Mortgages: Balloon mortgages require the borrower to pay a substantial payment of the principal of the loan in one single payment at the end of the loan;
- Fixed Rate Mortgages: A loan in which the interest rate and the amount that a borrower pays each month remain the same over the entire mortgage term which are traditionally 15 or 30 years. Additionally, lenders frequently offer variations on fixed rate mortgages, including a fixed five or ten year rate with variable interest rates for the remainder of the loan. They may also offer a balloon payment at the end of the mortgage term;
- Adjustable Rate Mortgages: An adjustable rate mortgage has an interest rate that fluctuates according to the current market interest rate. In the beginning of the mortgage term, the rate is generally lower than the market. Over time, the rate on the loan will then go up and down in response to the market; and/or
- Interest-Only Mortgages: With an interest-only mortgage, the borrower pays only the interest amount each month on their mortgage, without paying any of the principal. At the end of the mortgage term, the borrower will refinance in order to pay off the principal loan amount. While these loans initially seem affordable, at some point the borrower must pay off the principal in order to own the home.
What Is An Acceleration Clause?
An acceleration clause is a contract term which requires the borrower to pay off the entire remainder of the loan amount, in the event that they default on one or some of the payments. The contract performance is “accelerated,” which means that the entire amount becomes due when the agreed upon circumstances are triggered.
In some cases, the borrower might only be required to make good on any past missed payments. However, in most cases, they will be required to pay the entire remaining amount, plus interest and other costs. This is generally only the interest at the current time, and not interest on future payments. In many cases, the borrower cannot afford to pay the entire remaining amount, which will generally result in a foreclosure on the property.
To reiterate, the exact terms for an acceleration clause will vary for each individual contract. It is generally up to the parties involved to agree upon when the clause is put into effect, and when the remaining loan amounts are due. Acceleration clauses generally are not automatically triggered; meaning, the lender must generally inform the borrower of their decision to claim their accelerated payment rights.
An acceleration clause may be triggered due to:
- One missed payment;
- Several missed payments;
- Failure to obtain homeowner’s insurance, or a failure to keep such insurance payments current;
- Breach of any other contract terms; and
- Various property tax issues.
Acceleration clauses are most commonly triggered by one missed payment. This is especially true in contracts in which both parties are coming from a business background.
What Is Mortgage Reinstatement?
Generally, real estate lenders do not want to be associated with property that has fallen into a state of foreclosure. Because of this, they may allow a borrower to escape an acceleration clause, thereby avoiding foreclosure. This would be through a loan modification, or an alternative repayment plan. These options are known as “mortgage reinstatement,” which means that the lender reinstates the loan, but under different term agreements.
This can help both the lender and the borrower to continue working together in owning and/or managing the property. However, the borrower might be required to pay off any costs incurred by the lender as associated with the original acceleration clause issue.
Do I Need A Lawyer For Help With Acceleration Clauses?
You should hire a mortgage lawyer in your area if you need assistance in negotiating or handling an acceleration clause.
An experienced attorney can help you understand your legal rights and options according to your state’s specific laws, which can help you avoid any legal disputes and prevent a misinformed signing of contract terms.