There is a term in the world of real estate finance called “acceleration.” And while at first glance it might sound as if your equity is growing or your value is going up, acceleration is actually not a very good thing. All lenders, both private and real estate acceleration clauseconventional place acceleration clauses in all of their loan documents. What does an acceleration clause mean and when does it apply?

 The term acceleration applies to the lender speeding up, or acceleration, getting the outstanding mortgage paid. Quickly. As in now. An acceleration clause cancels the terms of a mortgage entirely and the mortgage ballgame is pretty much over for the borrower. Here’s an example:

A property owner falls on hard times and misses a mortgage payment. The lender doesn’t pay a whole lot of attention to missing the first of the month but starts to get real nervous when two payments in a row go missing. The lender then mails out a demand letter commonly referred to as a Notice of Default and informs the borrower how much is past due, how much needs to be paid and by when. Otherwise, the lender will foreclose. This triggers the acceleration clause and the lender says “we need our money now.”

When distressed borrowers face a foreclosure filing, it’s due to acceleration language in the loan documents that allow a lender to call in the note.

Another even that can trigger an acceleration clause is transferring the property to another individual without the lender’s permission. This is typically as a result of transferring the deed to someone else, hoping to get out from under the mortgage. Yet the lender didn’t give the delinquent borrower permission to transfer ownership and the deed transfer will likely not only be likely but the borrower still is liable for the mortgage.

So-called “wraparound” or “wrap” mortgages, an instance where the owner transfers title to a third party, collects the monthly payments from the new “owner” then forwards the mortgage payment to the lender who is typically none the wiser. At first. Wrap mortgages aren’t necessarily illegal, and lenders may in fact allow a wrap but only by reviewing the potential transaction in advance. Otherwise, hello acceleration clause.