Mortgages have to be some of the most complex legal documents the majority of us run across in our lives. They’re always full of clauses that cover the spectrum, from “weird but okay” to “I’m going to lose everything if I even sneeze the wrong way.” A few of those clauses fall under the category of “Demand Features” and have kept many a real estate investor awake at night. But what does a demand feature mean in a mortgage loan, and are you required to agree to them?
A demand feature in a mortgage is a clause that says the lender may require payment in full for the remainder of the mortgage. Most demand features are tied to variables having to do with being behind on payments or selling the house. One feature, known as a Demand Clause, can allow the bank to demand payment in full at any time for any reason.
To be honest, this isn’t something I deal with often. However, I understand how intimidating it can be to see demand features, so I wanted to write a post specifically covering what demand features are, how they work, and what you can do if the dreaded Demand Clause shows up in your mortgage. Let’s dive in.
What is a Demand Feature?
First, let’s clearly define what a “demand feature” is because it might not be what you think. I’m going to rip the band-aid off and take the big, scary definition straight from the Consumer Finance Protection Bureau website:
“If the demand feature is checked ‘yes,’ [in your mortgage contract], the lender can require that you immediately pay the entire loan balance (principal and interest) at any time. The lender can make this demand on you for any reason or for no reason.”
Okay, that sounds really terrifying, right? The good news is that, while it’s the definition for “demand feature,” that’s not the only way demand features are handled.
Demand features are all variations of how your lender is protecting themselves from losing money on a bad investment. Can all demand features allow the bank to require payment in full for your mortgage? Yes. The catch is that most demand features only come up when you’re really behind on your payments. Then you’ll receive what’s known as a “demand letter” from your bank, saying that your loan note is now being called.
In all likelihood, this is the extreme case scenario and not something you’ll see if you’re behind 1-2 mortgage payments. Your lender probably doesn’t want to do this; they know that you probably can’t come up with the outstanding amount if you can’t even make your monthly payments. Having demand features added into mortgage loans covers their bases to say, “Look, either you pay up, or we foreclose.”
So let’s talk a little more about the types of demand features you’ll come across and how they work.
Three Types of Demand Features in a Mortgage Contract
There are three pieces of legalese that are considered demand features in a mortgage:
- Acceleration Clause – Very standard; you’ll see this in nearly every loan you get. An acceleration clause says that if you miss any contractual obligations like missing payments or not paying your insurance, the lender can call in the loan note to be paid in full.
- Due On Sale – This one is a little more complicated but still fairly standard. If you decide to sell the home without paying off your loan, your Due on Sale clause says that the loan will be passed onto the new buyer. Until that time, you’re still liable for the loan, so you can’t stop making payments while putting the house up for sale. Once you transfer ownership to the new buyer, they’ll then be liable for the loan.
- Demand Clause – This is the big, scary one. The good news is that having a demand clause is not standard. This clause says that your lender can demand payment in full at any time for any reason. That said, you really need to make sure your mortgage contract does not have a demand clause before signing because once your signature is there, there’s no turning back.
Are Demand Clauses Required for a Mortgage?
While Acceleration and Due on Sale clauses are pretty standard, they’re not exactly “required.” As long as you’re diligent with making your monthly mortgage payments, neither of these will come into play.
The Demand Clause is only required if your lender says so. Again, these are not standard, so don’t feel that you have to agree to have one in your mortgage contract. You or your attorney can negotiate to have it removed, or you can walk away and find another lender.
Why Would a Lender put a Demand Clause in a Mortgage Loan?
So why would a lender put such a terrifying piece of legalese into a mortgage? Like I said before, it’s not like them adding it into your contract means it’s any easier for them to get paid in full if you’re delinquent.
It comes down to whether or not your lender has faith in your ability to pay. Your loan application may have put you in some gray area where they’re willing to front the cost of your new home, but with a few asterisks attached. If your lender is insisting on a Demand Clause being added, it’s worth taking the time to ask why. It could be something having to do with your employment or credit history, or it might be something that could be cleared up (like a misunderstanding of what your application said).
Don’t take their insistence at face value; it’s worth following up and asking for clarification. You may be able to negotiate your way towards having that clause removed or at least knowing what to fix before moving onto a new lender.
Demand features aren’t fun to deal with regardless of your history with a lender. Unfortunately, most of them are just part of the game when it comes to real estate. While they might seem scary, it’s best to think of demand features as just the way your lender is protecting themselves should things turn sour. Make sure you and your attorney look through your mortgage loan thoroughly to see which clauses are part of your contract. If you find a Demand Clause, do whatever is in your power to re-establish the trust your bank has lost to get that clause removed.
Have you run across demand clauses in your mortgages? Leave a comment and let me know how you’ve handled it.