Definition
A Subordination Agreement is a legal document that establishes the priority of different liens or mortgages on a property, determining which lender or creditor gets paid first in case of foreclosure. It allows one debt to take precedence over another, even if it was recorded later.
Explanation
Subordination agreements are common in mortgage refinancing and second mortgages. Without this agreement, liens are typically ranked in the order they were recorded. However, when a homeowner refinances their first mortgage or takes out a second loan, the new lender may require a subordination agreement to maintain its priority position.
When Is a Subordination Agreement Needed?
- Refinancing with an Existing Second Mortgage – If a homeowner refinances their first mortgage, but still has a home equity loan or HELOC, the lender may require a subordination agreement to keep the new loan in first position.
- Home Equity Loans (Second Mortgages) – A homeowner takes out a home equity loan, which is automatically placed behind the first mortgage unless a subordination agreement modifies priority.
- Commercial Real Estate Loans – Businesses with multiple loans secured by a property often require subordination agreements to ensure priority for senior debt holders.
How It Works
✅ Without a Subordination Agreement:
- Mortgage 1 (First Loan) – $300,000 (Recorded first, highest priority)
- Mortgage 2 (Second Loan) – $100,000 (Recorded second, lower priority)
✅ With a Subordination Agreement (Refinancing):
- Mortgage 2 (Second Loan) – $100,000 (Now temporarily in first position)
- New Mortgage 1 (Refinanced Loan) – $310,000 (Subordination agreement restores first position)
Key Benefits:
- Protects first mortgage lenders when refinancing.
- Helps borrowers secure better loan terms when refinancing.
- Prevents legal disputes over which lender gets repaid first.
Example
A homeowner has:
- A $250,000 mortgage (first loan).
- A $50,000 home equity loan (second loan).
They refinance the first mortgage to a new loan for $275,000. Without a subordination agreement, the home equity loan would move up to first position, making refinancing more difficult. To fix this, the lender requires a subordination agreement to keep the new mortgage in first position.