Did you pay attention when you signed your closing documents? Do you know the fine print that was provided to you? If so, do you know if your loan has a demand feature?
Don’t worry if you don’t know, as many borrowers are not aware. It is something you should understand though and moving forward, you should consider if your mortgage loan has this feature.
The Demand Feature Defined
The demand feature means the lender can ‘call’ your loan at any point. This means the principal and interest due at that point. But before you panic, there are three different features that can fall under the demand clause:
- Acceleration clause – This clause gives the lender the right to demand full payment of your mortgage because you violated the contract. For example, if you don’t pay the loan as agreed, you violate the contract and could owe the full amount because the lender ‘called it.’
- Due on sale clause – If you move out of the home and sell it, you cannot just pass the mortgage along to the buyer. The due on sale clause means the mortgage is due when you sell the home. In other words, your buyer cannot assume the loan.
- Demand clause – A lender can call your loan for any reason if it has a demand clause. You will know if this is the case, as the box will be checked on your Loan Disclosure. Make sure to pay careful attention to this area of the document to make sure you know if your loan has a demand feature.
If your loan has a demand clause, it’s important to find out the circumstances in which a lender can call the loan. Does it have a general demand feature, meaning the lender can call the loan at any given point? Or do you have to violate the contract and/or sell the home in order for the lender to require payment in full?
Knowing ahead of time what you are dealing with can help you proceed appropriately. For example, if you know your lender can call your loan if you don’t make your payments as agreed, you might be more likely to make an effort to make your payments. If you sell your home, you know you have to pay the loan off in full unless you have an assumable loan, which the Loan Estimate would signify for you.
The demand feature sounds scary, but it’s not as common as you think. Most lenders require borrowers to pay the loan in full if they sell the home, so the due on sale clause is rather common. The acceleration clause and demand clause are less common, but are worth understanding in case it happens to you.