What Is a Demand Clause?

August 7, 2000, revised September 10, 2003

"Is a demand clause the same thing as a due on sale clause? I shopped for a loan at several lenders, and the information on requirements was very similar among them except that one lender stipulated that the note would include a demand clause. "

A demand clause is even better (for the lender) than a due on sale clause. With a due on sale clause, the loan must be repaid upon sale of the property. Its purpose is to protect the lender in a rising interest rate market. Lenders are concerned that borrowers with low-rate loans who sell their homes will arrange for the buyers to assume the loans. Lenders want these loans repaid so they can make new loans at higher rates.

A demand clause allows the lender to demand repayment for any reason. It protects the lender against having low-rate loans assumed by home buyers in a rising rate market just as effectively as a due on sale clause. But in addition, a demand clause permits the lender to raise your interest rate in a rising rate market even when you aren’t selling your house. The lender can force you to accept a higher rate by threatening that if you don't agree, the loan will be called.

A demand clause is also better (for the lender) than an acceleration clause. An acceleration clause allows the lender to call the loan if the borrower violates some contractual provision, such as a requirement that the loan must be repaid upon sale of the property.

The lender requiring a demand clause will no doubt disavow any intention of behaving in such a manner. But in my view you don’t put your head on a chopping block just because the executioner promises not to cut it off.

The Truth in Lending Disclosure has a statement that reads “This loan has a demand feature,” which is checked “yes” or “no.” Some lenders will check “yes”, even though the note has an acceleration rather than a demand feature. Nonetheless, if it is checked “yes”, you want to examine the relevant sections of the note. 

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