Find out how and why your mortgage lender can ask for an early payment of the loan.
So you’re hunting for a new home for your family, and let’s assume you found one too. It’s big and beautiful, just like you wanted. When you put your finger on it, the mortgage process starts. You will be contacted by the mortgage lender who will then proceed with your application.
But wait, don’t sign it yet!
Read through the contract thoroughly because there might be a few clauses you’re agreeing with unknowingly.
For an extended benefit of the lenders, a demand feature is added in the contract, and you are also required to check-in the box for this feature to be applicable. But make sure you know what this is before agreeing to it.
What is a Demand Feature in a Mortgage Loan?
A demand feature simply allows the lender to demand the full payment of the loan before time, and you will have to comply with it if you’ve agreed to it in the contract. At that point, you will pay the principal amount and the interest that is associated with it. The lender can call you for the loan for any reason applicable, or no reason at all.
This feature protects lenders against having low-rate loans inferred by home buyers in a rising rate market. Even if the lender checks in the ‘yes’ box of demand feature and says he won’t ask you for it before time, don’t just blindly agree to what he’s saying. It is important for you to vigilantly see what options work for you and whether you know exactly what is being asked of you.
If the checkbox ‘no’ is signed, it could be a good sign for you, but, if you violate the contract in any way possible, the lender can call the loan. Moreover, if you’re selling the property before the mortgage loan ends, you will have to pay the mortgage to the lender immediately and that too in full.
Types of Demand Feature
There are three different clauses that fall under the category of a demand feature in a mortgage loan, make sure you understand each of these properly.
Acceleration Clause: This is a major reason why some lenders may call for the loan earlier than due time, because you may have violated the contract. If you’ve missed a few payments and the grace period too, the lender could ask for the whole loan under this accelerated clause.
Due on Sale: This clause, like the name suggests, is due when you sell the property. If there is a mortgage amount due when you’re selling the property, you will have to pay the principal amount plus interest yourself. This mortgage will not be transferred to the next buyer. So, with this due on sale clause, the lender can ask for full payment if he finds out you’re selling the property.
Demand Clause in Mortgage: The third one is the demand clause where the lender can ask for the loan before due time without any reason. If that happens, discuss with your lender and try to solve the matter with mutual understanding.
Do all Mortgage Loans have a Demand Feature?
All mortgage loans talk about the demand feature and have a set of conditions related to it. There are two empty checkboxes ‘yes’ and ‘no’ which the lender has to sign. If the lender signs ‘yes’, it means that the demand feature is applicable on the loan and vice versa.
You can have prior agreement with the lender and see what would make them demand an early loan, if the situation is avoidable then it’s fine. If the lender is strict with payments, make sure you never miss a schedule because it could cause a rift between the agreement and force the lender to call it.