Due on Sale, Demand and Acceleration Clauses

It is imperative to closely examine your mortgage or loan contract before agreeing to it or signing it.  The language may seem difficult, and at times impenetrable, but when your money is what’s at stake, it is extremely important to understand what you are agreeing to by signing your mortgage contract.  The Truth in Lending Act was signed into law for the explicit purpose of making lending arrangements and terms extremely clear to the borrower.  One of these terms is the existence of a “demand feature.”  Pay special attention to this detail on your mortgage or loan contract before signing it.

There are three types of clauses that could potentially fall under the category of a “demand feature.”  If your loan or mortgage contract states that it does have a “demand feature,” then you need to find out exactly what kind.  The simplest is the acceleration clause.  This clause stipulates that in the event you violate a contractual obligation, the lender has the right to “call” the loan – demand its payment in full immediately.

The next type of “demand feature” is the due on sale clause.  The purpose of this clause is to protect the lender against rising interest rates.  If you were to sell your house to a new individual and pass the loan onto them, the lender might be losing money if interest rates have been raised since the mortgage was taken out.  Thus, a due on sale clause stipulates that you must repay the loan in full when selling the home.  This way, the lender can rearrange the loan with the new homeowner and reap the benefits of higher interest rates.

The final type is known simply as the demand clause, and this means that the lender can demand repayment of the loan in full at any time for any reason.  This clause gives the lender the same powers as the acceleration and due on sale clauses, but also allows the lender to raise interest rates even if you aren’t selling your property.  The lender may even force the borrower to agree to a rate hike by threatening to call the loan.  These practices may not be ethically sound or even legal, but all borrowers need to be aware of them in case the lender attempts them.  Be sure to check your mortgage contract for any demand features before signing and discuss them in full with your lender.

And, if you’re interested, here is an interesting blog about Foreclosures.