Monday, September 30, 2019

What does a demand feature mean in a mortgage loan?

You need to pay close attention while signing your closing documents. The closing disclosure has a statement that says “Your loan has a demand feature” which is either checked “yes” or “no” by your lender. Before signing the document, you should understand what this statement really means.

Demand Feature

The Demand Feature means that your lender can call your loan at any time. This means that the Principal (borrowed amount) and the interest rate are due at that time. The lender can put this demand on you for any reason or even for no reason at all. 

There are three different features that fall under the category of Demand Feature, make sure you understand them properly.

  • Acceleration Clause

This clause allows your lender to demand the full payment of your home mortgage in case you have violated the contract. For example, you didn’t pay your mortgage as you had agreed in the closing document, you have missed a payment or have violated the contract with your lender in any way. Usually these conditions are written in your closing documents so make sure you go through them and fully understand them before signing your contract.

  • Demand Clause

If your closing documents has the demand clause checked “yes”, then your lender can ask for a full payment at any time for any reason. These reasons are usually not mentioned in your contract so discuss it with your lender in detail and maybe you both can come up with a solution for it.

  • Due on Sale Clause

This clause demands you to pay the full payment in case of selling your home. This means that you can’t just sell your house and pass the mortgage to the new buyer. In other words, your home mortgage is due when you sell the home and your lender will not assume the loan.

What should you do if the Demand Clause is checked “Yes”?

Do not panic even if your loan has a demand clause but make sure to find out the conditions in which your lender can ask for a full repayment. Go through the promissory notes in your closing documents to figure out these conditions or talk to your lender directly.  Find out that if it is a general demand clause which means that your lender can ask for the mortgage at any time or your lender will only call the loan in case you violate any particular terms and conditions from your contract.

For example, if the demand clause is only applicable in case you don’t pay your monthly payments on time, then you can put extra efforts to be more punctual with your payments. Or if you are selling your home, you have to pay off the loan first before proceeding with the selling process. Or in worst case scenario, your lender will force you to increase the interest rate by threatening you that if you don’t agree, your loan will be called. Finding out these conditions before signing the closing documents can really help you to proceed with your mortgage appropriately. 

If you think you can’t fulfill any of such conditions in the coming years of your mortgage, you should really discuss this with your lender. This demand clause does sound frightening but is not very common across the United States. It is advised that you completely understand the terms used in your key documents and what do they really mean before signing your contract.

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