Understanding an Acceleration Clause & Deed of Trust in Your Mortgage Agreement
Posted on November 22, 2009
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A borrower must not leave anything unread in their mortgage agreement or loan contract before signing. Oftentimes, typographical errors can lead to legal procedures which would incur further unnecessary costs that could have been avoided if legal documents were well reviewed and filled in, such as:
- Spelling of trustors' names
- Principal balance of the mortgage loan
- Interest rate (and the rider, if modifiable)
- Payment amount
- Prepayment penalties, if any
- Address of the property
In real property purchases, mortgage agreements normally contain Acceleration Clause, Deed of Trust and a Promissory Note.
Before signing a loan contract or any contract for that matter, it must be read thoroughly. If possible, have it read by a mortgage lawyer. Anything you found disagreeable must be cleared up. Otherwise, you are obligated to conform to what was written in there, which usually is in the favor of the mortgage lender. Better be safe than sorry.
What is an Acceleration Clause in a Mortgage Contract?
These are the conditions of the loan written in the mortgage contract. This is the lenders safety net, that permits them to demand payment of the loans outstanding balance.
Typically, acceleration clause conditions can be, but not limited to:
- Forbidding the buyer/borrower from reselling the property without the lenders permission. This secures the lenders payment of an outstanding balance in the event of an early contract termination from the buyer/borrower.
- Forbidding the buyer/borrower to sell the assets placed as collateral of the loan. Collateral is commonly used to secure a loan. These assets can be collected, if under certain circumstances, the borrower failed to repay the loan.
Basically, acceleration clause is made to ensure compliance of these conditions. For instance, on-time payments on a specific date, mortgage contracts normally stipulate considerable late penalties to ensure the homeowner honors the mortgage terms.
What is a Deed of Trust in a Mortgage Contract?
It is a document that is recorded in the public records, which is normally used as an instrument or a type of security in refinancing real property purchases. A deed of trust contains settlement between the Trustor – referring to the borrower, the Trustee – referring to a neutral third party entity, and the Beneficiary – referring to the lender. Where:
- the trustor transfers the title of a real property to the trustee to secure payment of the debt,
- the trustor receives the money from the beneficiary,
- the trustor claims the title back from the trustee after the deed of trust is paid in full,
- the trustee can foreclose unpaid property or substitute another trustee to handle foreclosure,
- the trustee has the power to sell if the trustor defaults on the loan to pay the beneficiary.
Which holds true to the following mortgage loan terms:
- Original loan amount
- Legal description of the property being used as security for the loan
- The three parties
- Inception and maturity date of the loan
- Provisions of the loan and requirements
- Late fees
- Legal procedures
- Acceleration and alienation clauses
- Riders, as prepayment penalties or the terms of a modifiable mortgage.
Borrowers most of the time get confused between mortgage and deed of trust. Remember that a mortgage does not have a trustee while in Deed of Trust, the trustee which generally is a reputable company is the one who:
- Has the “Power of Sale” in the event of default.
- Reconveys the property once fully paid.
- Files a Notice of Default in the course of default.
- Can substitute another trustee to handle the foreclosure under a Substitution of Trustee.
- Can sell the property after completing the 90-day period in the public records and the 21-day publication period in the newspaper, even without a court procedure.
- Has the option to let the trustor redeem the property as long as the back payments and trustee's fees were paid during the three-month period after filing the Notice of Default.
Take note that the trustor can no longer rescue the property once it sells at the Trustee's auction/sale. If any of these situations apply to you, its importnant to speak with someone who is knowledgeable about an acceleration clause or deed of trust.
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