Can mortgage payments be made out of sequence?

[Craig A.]

I sold a home to someone I know. I am carrying the mortgage. There were no agents involved and an attorney drew up the papers. But now she's out of business. The buyer pays me twice per year (two large payments, one every six months). He is seven months behind on one payment (I'll call it payment 'A') but wants to make the next payment (I'll call it payment 'B') without making the previous payment (A). He wants to do that to avoid a late fee on the more recently due payment (B). I told him, "Look, I don't think you can make payments out of sequence like this. You need to pay the outstanding/late payment (A) first." There is nothing in the contract that addresses this situation. What should I do? Am I required to take his recent funds and apply it to the recently due payment (B), or should I insist that the funds go toward the oldest-due payment (A)? 

I was about to start foreclosure proceedings, until he sent me this recent money. That's another complexity. If I allow the recently received funds to apply toward the most-recently due payment (B), then what happens with the older payment (A) that was never made? Since the older payment is now seven months late, can I still proceed toward foreclosure, even though he just made a payment? I doubt it. The property is in California, where 90-days-late is required before filing a Notice of Default to begin the foreclosure process. I live in Oregon.

To summarize:

1. Can payments be made out of sequence? (He stated in the recently submitted payment that it was to apply to (B).)

2. How does this affect my ability to proceed with foreclosure?

This is very complicated. Sorry. But what a mess.