As part of the foreclosure process the lender often declares an acceleration of the loan. There is a simple reason acceleration is used: to determine the amount the borrower owes under the foreclosure.
The loan acceleration provision within the mortgage contract allows the lender to declare the entire debt due and payable. Usually within the language of the loan or mortgage there is a provision that allows the lender to make the full amount of the principal due immediately when the borrower breaches the contract. The acceleration clause makes the full amount due, not just the part of the loan that is past due. In other words, if a borrower signs a loan of $175,000 on a property with monthly payments required and the borrower stops making the monthly payments, the lender has the right to demand the borrower immediately make good on the entire balance of the $175,000 loan.
Borrowers can avoid the lender accelerating the loan by keeping in contact with the lender's customer service department. If the payment will be late, the borrower should alert the lender as soon as possible. Being honest and forthright with the lender makes it more likely for the lender to cooperate with the borrower and not accelerate the mortgage. Many borrowers hide rather than contact their lender.
Few mortgages today do not have this vital acceleration clause. Although it is possible the acceleration clause is not included in a mortgage, it is unlikely. This important clause in a mortgage contract is what allows the lender to speed up the mortgage payments.
Acceleration of a mortgage is not specifically authorized by a state or federal law but rather by the loan agreement signed by the borrower and lender when the loan was granted.
Acceleration sometimes occurs through the natural aging of the overdue payment. Some lenders have a strict policy of accelerating a mortgage. For example, the lender might accelerate all loans that are ninety-one days overdue.
Consider a typical scenario where the borrower is obligated to make a $1,200 monthly payment on a $150,000 loan balance and review this payment requirement:
After 30 days the borrower owes…$1,200
After 60 days the borrower owes…$2,400
After 90 days the borrower owes…$3,600
After 91 days the borrower owes…$150,000 (the entire balance of the loan) plus late fees and any other expenses.
The mortgage acceleration is often referred to as calling in the loan. It is done when the lender decides there is no further sense in chasing the borrower for the monthly payments. It's also used by a lender when the borrower can't show that she is likely to be able to make future monthly payments on the loan.
Foreclosure is a process. That becomes abundantly clear as the legal proceedings begin. It is not an instant process however; it takes time to proceed. The ultimate goal is to get the borrower out of the property and the title to the property changed from the borrower to the lender. After that is accomplished, the property can then be sold and the lender can recover its money.
Each state has its own laws and procedures regarding foreclosures. It is all a matter of the lender repossessing the property. The lender is trying to recover the money that was loaned to the borrower by selling the property.
The formal foreclosure process commences after the borrower defaults on the loan payments and the lender seeks to repossess the collateral. The lender files a public notice, usually either a notice of default or a complaint in foreclosure.
The type of legal notice that is filed depends solely upon the laws of the state where the property is located. If the state allows either a judicial or a nonjudicial foreclosure, the lender will usually opt for the nonjudicial foreclosure.
There are two types of foreclosures:
The judicial foreclosure is carried out by the court, while the nonjudicial foreclosure is carried out through a process not directly supervised by a court. Some states use the judicial foreclosure, others use the nonjudicial foreclosure, and some offer both options to the lender.
The purpose of both the judicial and nonjudicial foreclosure is the same: to get the borrower out of the property and get the title back to the lender. Lenders want and need possession so the property can be sold and they can recover their invested money. Chapters 5 and 6 describe these two foreclosure methods in more detail.
What is a strict foreclosure?
Some states hold a legal view that the lender is the rightful owner of the real estate. As the owner, the lender can legally order the borrower to vacate the property after a specific period of nonpayment.
All states have enacted laws about how a mortgaged property is to be sold after a foreclosure has been started. Usually a public foreclosure auction is scheduled and advertised. Depending on the locale, the property is sold by the sheriff “by public outcry” on the steps of the county courthouse or by an auctioneer at the property.
The foreclosure usually commences after ninety days of delinquency, or in other words, after the borrower has missed three payments. At this point in the breach of contract, the lender is ready to do something and is no longer willing to wait for payments. The lender usually refers the matter to its local attorney.
Within a short time the legal progress begins in earnest. The local attorney prepares the official documents, files them in the courthouse, and moves the foreclosure process forward. Depending on the state laws and local court rules, the foreclosure may become public knowledge at this point. Notices of the pending foreclosure may be posted in public places or advertised in local newspapers. Hearings may be scheduled, giving the borrower an opportunity to prove the payments had been made as agreed and that the foreclosure should not proceed.