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Betty Piotro…, Real Estate Pro in Morris Township, NJ

what is an acceleration clause?

Asked by Betty Piotrowski, Morris Township, NJ Sun Apr 29, 2012

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A provision in a contract or promissory note that if some event (like not making payments on time) occurs then the entire amount is due or other requirements are due immediately. This clause is most often found in promissory notes with installment payments for purchase of real property and requires that if the property is sold then the entire amount of the note is due immediately (the so-called "due on sale clause.")
1 vote Thank Flag Link Sun Apr 29, 2012
Hi Betty,

As defined by Investopedia.com and acceleration clause is, "A contract provision that allows a lender to require a borrower to repay all or part of an outstanding loan if certain requirements are not met. An acceleration clause outlines the reasons that the lender can demand loan repayment."

But I think a more important question is why do lenders have such a provision. In a normal real estate transaction where the buyer is getting a loan to pay for their new house, the bank/lender has the buyer sign a promissory note. In return the buyer allows the bank/lender to take the house as collateral. This collateral is the mortgage. Now if a buyer for some reason wants to do a land contract or in some way transfer title to the home then the lender loses their collateral. Of course they don't want the lendee/home owner dong this so the have the acceleration clause to protect themselves in this event. If you own a home and are about to do something that may trigger the acceleration clause it would be best to consult with a real estate attorney. This is only one reason a lender/bank would exercise the acceleration clause.

All the best,
Jeffrey Paeltz, ABR SFR
0 votes Thank Flag Link Sun Apr 29, 2012
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