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The Mortgage Subordination Agreement
By Barbara Pronin
Subordination involves putting a debt or claim in a lower position behind another debt. A subordination agreement comes into play when there are two existing mortgages, or liens, on a home - a first mortgage and a second mortgage, perhaps a home equity loan or a home equity line of credit - and the homeowner wants to refinance the first mortgage.
 
If the homeowner does not plan to pay off the second mortgage as part of the refinancing, then the lender on the second mortgage must agree - via a subordination agreement - to take second position. Lien position is important because it gives the primary lien holder, or mortgage company, priority in the interest of the property. In other words, if a homeowner goes into default, the mortgage company in first position will be paid from the sale of the home before the mortgage company in second position.
 
As in any mortgage transaction, the title company researches the liens on the property. It’s our job to determine when subordination is needed, and to get the subordination agreement from the appropriate lien holder. Upon closing, this agreement is recorded along with all other recordable documents in the transaction.
 
Most of the subordination agreements we request are from banks, credit unions, private lenders, city or state municipalities, and sometimes from the IRS. No matter who the lien holder is, however, if the subordination agreement is denied - that is if that entity is not willing to move to second lien position - then the homeowner/borrower will either have to pay off the lien requiring subordination, or the refinancing transaction will be cancelled.
 
Denial to subordinate happens most frequently when the total of the new mortgage debt would be almost as much as the home’s market value.
 
To summarize, there are three basic things to know about subordination:
  • It’s the process of keeping the first mortgage in first place, ahead of any other mortgage.
  • In refinancing the first mortgage, the lender will insist on subordinating the second mortgage.
  • The second lien holder is not required to subordinate - and likely will not if the total mortgage debt is almost as much as the home is worth. If they do refuse, the refinance will not go forward. 
Barbara Pronin is an award-winning writer based in Orange County, Calif. A former news editor with more than 30 years of experience in journalism and corporate communications, she has specialized in real estate topics for over a decade.

This material is not intended to be relied upon as a statement of the law, and is not to be construed as legal, tax or investment advice.  You are encouraged to consult your legal, tax or investment professional for specific advice.  The material is meant for general illustration and/or informational purposes only.  Although the information has been gathered from sources believed to be reliable, no representation is made as to its accuracy. 

 

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