When Is a Subordination Agreement Required

When it comes to real estate purchases, subordination agreements are a common requirement. A subordination agreement is a legal document that clarifies the order of priority between two or more loans. Typically, the subordination agreement subordinates the second mortgage or loan to the first mortgage or loan – meaning that the second mortgage is considered a secondary loan and will be paid after the first mortgage or loan is paid in full. But when is a subordination agreement required? Here are some instances where subordination agreements are necessary.

Refinancing

When refinancing a property, a subordination agreement may be required. This is because if there is an existing mortgage on the property, the new mortgage being taken out will have to be in a first position lien. If a second mortgage exists, then that mortgage will have to be subordinated to the new mortgage, so that the new mortgage can be in the first position. This is to ensure that if the property is foreclosed upon, the first mortgage will be repaid before the second mortgage.

Home Equity Loans

Home equity loans are when a homeowner takes out a loan against the equity in their home. If there is already a mortgage on the property, then the home equity loan will have to be subordinated to the first mortgage. This is to ensure that the first mortgage holder is paid before the home equity loan holder if the property is foreclosed upon.

Construction Loans

If a property is being built or renovated, then a construction loan may be taken out. In this case, the construction loan would have to be subordinated to the mortgage already on the property. This is to ensure that the first mortgage holder is paid before the construction loan holder if the property is foreclosed upon.

Leases

In some instances, a subordination agreement may be required in a lease. For example, if a business is leasing a commercial property that already has a mortgage, then the lease will have to be subordinated to the mortgage. This is to ensure that the mortgage holder is paid before the landlord if the property is foreclosed upon.

In conclusion, subordination agreements are typically required when there are multiple loans or liens on a property. They are necessary to establish the order of priority between the loans or liens and ensure that the first lien holder is paid before any secondary lien holders. As a real estate buyer or seller, it’s important to understand when a subordination agreement is required and to work with a knowledgeable attorney to ensure that all necessary documents are in place.