Subordination Agreement
Definition:
A Subordination Agreement is a legal document that establishes the order of priority for liens or claims against a property. It is typically used when a property has multiple mortgages or loans, and it determines which lender will be paid first in the event of a foreclosure or sale. The agreement can change the priority of one debt over another, ensuring that the higher-priority lender is paid off before any secondary lenders.
🔍 Did You Know?
Subordination agreements are often used when refinancing a property with existing loans, ensuring that the new lender’s claim takes precedence over other existing debts.
Examples:
Example 1:
A homeowner with a primary mortgage and a home equity line of credit (HELOC) wants to refinance the primary loan. The lender requires a subordination agreement to ensure the new loan takes priority over the HELOC.
Example 2:
A commercial property owner refinances their first mortgage but has an existing second mortgage. The lender requires a subordination agreement to keep the first mortgage as the senior lien.
Why It’s Important:
Subordination agreements help lenders protect their interests by ensuring the correct order of debt repayment. For property owners, it allows refinancing or obtaining additional loans without compromising the existing lender’s position.
Who Should Care:
- Homeowners and real estate investors looking to refinance or take out additional loans.
- Lenders ensuring their loan is prioritized over other debts.
- Real estate attorneys managing loan structuring and refinances.
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