What Is a Subordination Agreement, and How Does It Work?

A subordination agreement can play a crucial role in refinancing and home equity borrowing. Learn how subordination agreements work and why they matter in mortgage financing.

At-A-Glance

• In real estate, a subordination agreement can adjust mortgage priority, ensuring that a refinance loan takes precedence.
• These agreements help establish a clear lien position hierarchy, which can be important in cases like foreclosure.
• A subordination agreement may be needed when multiple loans exist on a property.

If you’re considering refinancing your home or taking out a home equity line of credit (HELOC) in Los Angeles, you may encounter the term “subordination agreement.” While it may sound complex, it’s a standard financial tool used to clarify loan priority when multiple lenders are involved.

What Is a Subordination Agreement?

A subordination agreement is a legal document that determines the order of repayment for debts. If a borrower defaults on their loan or declares bankruptcy, the priority of debts established in the agreement dictates which creditors get paid first.

These agreements are particularly common during mortgage refinancing. When you obtain a mortgage, your lender records it as a “first mortgage” in the land records, creating a lien on your property. If you take out an additional loan, such as a home equity loan or HELOC, the new lender records a “second mortgage,” which is considered a subordinate lien.

Typically, the first mortgage has a higher priority for repayment in foreclosure, while the second mortgage is next in line. However, some liens, like property tax liens, may take precedence over both.

Why Does Subordination Matter?

Debt priority is crucial, especially in cases of financial hardship or foreclosure. The higher a debt’s priority, the more likely it is to be repaid. If a mortgage lender is in a lower priority position, they may not receive full repayment in case of a foreclosure sale.

Why Are Subordination Agreements Used in Refinancing?

If you have two mortgages and want to refinance your primary loan, the original subordinate loan would automatically move into first position. Many lenders won’t approve a refinance if their new loan becomes subordinate. In such cases, the refinance can only proceed if the existing subordinate loan lender agrees to a subordination agreement, allowing the new lender to take first position.

Another option is refinancing both loans into a single mortgage to avoid subordination issues altogether.

Who Benefits From a Subordination Agreement?

Subordination agreements primarily benefit the new lender, ensuring their loan takes priority over other existing loans. However, existing lenders may not always agree to become subordinate, as it reduces their repayment priority.

Final Thoughts

Understanding subordination agreements is essential if you’re refinancing or taking out a second loan on your home in Los Angeles. Ensuring that your new mortgage has the right lien priority can streamline the refinancing process and protect your financial interests.

Need expert mortgage guidance in Los Angeles? Contact Los Angeles Mortgage Lender today!

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