A demand option is a provision that is found in most types of mortgage contracts, and has to do with the right of the lender or mortgagee to demand full repayment of the loan mortgage loan. In order for this option to be exercised, certain events have to occur that provide the lender with reason to believe that the borrower is unable or unwilling to honor the original terms of the repayment schedule. When this is the case, the lender can exercise the demand option and begin the process of foreclosure if the loan is not settled in full within a short period of time.
The purpose of the demand option is to protect the interests of the lender and decrease the level of risk that is assumed by granting the mortgage loan request. Typically, the structure of the option allows the lender to take certain actions if and when the borrower falls a certain number of payment behind in the mortgage schedule. While the number of missed payments involved will vary somewhat from one jurisdiction to another, the lender may declare the borrower in default on the loan once the due dates for those payments have passed, and notify the borrower that the entire remaining balance of the loan is due by a certain date. Unless that amount is tendered by that date or the lender and borrower are able to arrive at some sort of arrangement to catch up the past due payments, the lender then has the option of using the court system to move forward with a foreclosure on the real estate involved.
Typically, exercising a demand option is seen as a last resort, when all other efforts to work with the borrower and restore the loan account to good standing have failed. Prior to invoking the option, many lenders will attempt to offer deferred payment plans, especially for borrowers who have experienced some sort of catastrophic event that has negatively impacted the ability to make the payments on time, such as an extended illness or the sudden loss of a job. Only when these efforts have been rejected or if the borrower is uncooperative will a decision be made to move forward with the demand option.
When a demand option on a mortgage contract is invoked, several outcomes may result. The borrower may in fact come up with the money to settle the total balance of the mortgage by the date named in the notification of the demand, effectively ending the debt obligation and allowing the two parties to go their own way. More commonly, the borrower will not be able to pay this type of lump sum and foreclosure proceedings will ensue, often leading to the eviction of the borrower from the property. Since this entire process of foreclosure and eviction can be quite costly, lenders tend to not move forward with a demand option until all other options for resolving the issue have been exhausted.
