What is a loan subordination agreement?
A loan subordination is the process of ranking home loans (first mortgages, home equity loans, or home equity lines of credit) to alter the priority of a debt when collecting from a debtor with multiple liens on a single property. Through subordination, lenders assign a “lien position” to your loans. Generally, a first mortgage is assigned the first lien position while your home equity loan is in the second lien position. This means that in the event that you default on your mortgage, and the property is sold, the outstanding mortgage loans will be paid off in the order of lien position.
For example, if you have a Home Equity Line of Credit (HELOC) and an active first mortgage, these two loans will result in separate liens placed on the property and the "lien priority" must be established. In this scenario, your first mortgage is in the first lien position and the HELOC is in the second lien position. When you apply for a refinance on your first mortgage, this mortgage is paid in full via the refinancing process. Your HELOC automatically moves from the second lien position to the first lien position because your first mortgage has been paid off. Through a subordination process, your lender re-assigns your HELOC from the first lien position back to the second lien position, subordinate to your new first mortgage.
Mortgage lenders don't like the risk associated with a second lien, so a loan subordination agreement is common in cases where there is a HELOC tied to the original first mortgage.
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