
A subordination agreement mortgage can be a complex process, but understanding the basics can help you navigate it with ease. The process typically begins with a lender requiring a subordination agreement from a second mortgage holder.
This is because the first mortgage lender wants to ensure that the second mortgage is subordinate to the first mortgage, meaning it has a lower priority in terms of repayment. The lender may request this agreement to protect their interest in the property.
In general, a subordination agreement can be necessary when a second mortgage holder wants to refinance or sell the property. The agreement ensures that the second mortgage is paid off before the first mortgage, or that the second mortgage holder agrees to the new terms of the first mortgage.
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What is a Subordination Agreement?
A subordination agreement is an agreement with second mortgage, HELOC, or other lienholders to subordinate their debt to the primary mortgage. This agreement is critical in situations where a property owner has multiple mortgages or liens against their property.

You don't have to worry about creating or executing this agreement, but you'll likely see it at the closing. Without the other lienholders agreeing to subordinate their liens, a first mortgage lender won't close on your loan.
A subordination agreement is required when refinancing a first mortgage to put the newly refinanced loan in first position and the existing second mortgage in second position. For example, if you have a first mortgage and a HELOC, you'll need a subordination agreement with your HELOC lender to put the HELOC in second position and the newly refinanced loan in first position.
Typically, a subordination agreement is executed at the closing of a refinance or new loan, and it's essential to have all lienholders agree to subordinate their liens before the first mortgage lender will close the loan.
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Why and When is a Subordination Agreement Needed?
A subordination agreement is typically needed in two primary scenarios: when refinancing the primary mortgage and when taking out a second mortgage or HELOC. This is because the new loan or mortgage would take a secondary position to any existing second mortgages or HELOCs.
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In these situations, a subordination agreement is required to ensure that the newly refinanced mortgage or second mortgage remains the primary lien. Without it, the existing second mortgage or HELOC would take precedence over the new loan, which can be financially impractical.
Here are the two main scenarios where a subordination agreement is needed:
- Refinancing the primary mortgage: To keep the newly refinanced mortgage as the primary lien.
- Taking out a second mortgage or HELOC: To ensure that the new loan does not take precedence over the existing primary mortgage.
Why Matters
Mortgage subordination matters because it maintains the hierarchy of liens. This is crucial in case of a property sale or foreclosure.
Without subordination, refinancing or obtaining additional loans on a property can become extremely difficult or financially impractical.
A subordination agreement is only needed if you're keeping the second mortgage. This is because consolidating the second mortgage into the new refinance makes subordination unnecessary.
This agreement places the HELOC back in second position behind the new first mortgage. This is essential for the new first mortgage lender to be in first position.
The HELOC or home equity loan would otherwise jump into first-lien position the moment you pay off the existing first mortgage. This is unacceptable to the new first mortgage lender.
In case of loan default, the second mortgage would be paid off first. This is why subordination is necessary to maintain the priority of liens.
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When Would a Request Be Made?
A subordination agreement is typically requested in two primary scenarios. In the first scenario, refinancing the primary mortgage is needed to keep the newly refinanced mortgage as the primary lien. This is because the new mortgage would technically take a secondary position to any existing second mortgages or HELOCs.
A subordination agreement is also requested when taking out a second mortgage or a home equity line of credit (HELOC). In this case, the primary mortgage lender needs to ensure that the new loan does not take precedence over the existing primary mortgage.
Here are the two primary scenarios where a subordination agreement is requested:
- Refinancing the Primary Mortgage: When a homeowner refinances their first mortgage, a subordination agreement is required to keep the newly refinanced mortgage as the primary lien.
- Taking Out a Second Mortgage or HELOC: If a homeowner wants to take out a second mortgage or a HELOC, they may need a subordination agreement from the primary mortgage lender to ensure that the new loan does not take precedence over the existing primary mortgage.
Why Need a?
You need a subordination agreement when refinancing a primary mortgage to ensure the new mortgage remains in the first lien position. This is crucial because without it, the new mortgage would technically take a secondary position to any existing second mortgages or HELOCs.
A subordination agreement is required to keep the newly refinanced mortgage as the primary lien. This is especially important in case of loan default, where the primary mortgage lender gets paid off first from any foreclosure proceeds.
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You also need a subordination agreement when taking out a second mortgage or HELOC. This ensures that the new loan does not take precedence over the existing primary mortgage.
Refinancing the primary mortgage is one of the primary scenarios where a mortgage subordination is requested. Taking out a second mortgage or HELOC is the other main scenario.
Here are some key reasons why you need a subordination agreement:
• Refinancing the primary mortgage
• Taking out a second mortgage or HELOC
In summary, a subordination agreement is essential when refinancing a primary mortgage or taking out a second mortgage or HELOC to ensure the new loan does not take precedence over the existing primary mortgage.
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Key Characteristics and Risks
Subordination agreement mortgages have some key characteristics and risks that homeowners should be aware of.
Subordinate financing always takes a back seat to the primary mortgage in terms of lien priority, making it a higher risk investment for lenders.
This lower priority status can result in higher interest rates, increasing the overall cost of the loan.
Homeowners, however, can benefit from the flexibility offered by subordinate loans, which allow them to access the equity in their homes without refinancing their primary mortgage.
Managing multiple mortgage payments can strain finances, making it essential for homeowners to carefully consider their financial situation before taking out a subordinate loan.
Here are some key characteristics and risks of subordinate financing:
- Lower Priority: Subordinate financing always takes a back seat to the primary mortgage in terms of lien priority.
- Higher Risk: Due to their lower priority, subordinate loans are often considered higher risk, which can reflect higher interest rates.
- Flexibility: These loans offer homeowners additional financial flexibility, allowing them to access the equity in their homes without refinancing their primary mortgage.
- Increased Financial Burden: Managing multiple mortgage payments can strain finances.
- Higher Interest Rates: Subordinate loans often come with higher interest rates, increasing the overall cost.
- Risk of Foreclosure: Failure to meet payment obligations on any mortgage could lead to foreclosure.
Subordination Agreement Process
The refinance lender will put together a "subordination package" that includes all the necessary documents for the HELOC lender to sign. This package is a crucial step in the subordination agreement process.
The HELOC lender will send the completed agreement to your refinance lender, and it will become part of the final loan document package. The agreement is usually sent electronically, but physical copies are also accepted.
At closing, the HELOC lender sends the completed agreement to your refinance lender, and the agreement becomes part of the final loan document package. The HELOC then moves to second position, meeting the refinance lender's requirement.
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How to Get an Agreement
You'll be happy to know that getting a subordination agreement is a relatively straightforward process. The refinance lender will handle most of the heavy lifting.
They'll put together a "subordination package" that includes all the necessary documents for the HELOC lender to subordinate. This documentation can vary by HELOC lender, but the lender will have their own template.
You, as the borrower, won't be responsible for finding a subordination template. The HELOC lender will take care of it for you.
The HELOC lender will send the completed agreement to your refinance lender, where it will become part of the final loan document package.
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Time Requirements
Subordinations can take 10 business days or longer.
If rates drop, HELOC lenders will get backed up processing an onslaught of subordination requests, which can take a month.
The HELOC lender won’t pay for lock extensions, expired appraisals, or new credit reports.
Have your refinance lender request the subordination immediately so you can close your refinance sooner.
You can help too: call your HELOC lender and let them know that you’re waiting on the subordination.
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Financial and Legal Considerations
Before entering a subordination agreement, it's essential to assess your financial health and ability to manage additional monthly payments. This involves evaluating your income, expenses, debts, and credit score to determine if you can afford the increased financial burden.
Homeowners should compare the interest rates, terms, and potential risks of subordinate financing to make an informed decision. It's crucial to consider the higher risk associated with subordinate loans, which can reflect higher interest rates due to their lower priority.
A subordination agreement involves a legal process, where lien holders agree to rearrange the priority of their liens. This is typically facilitated through a subordination agreement, a legally binding document that secondary lien holders, like HELOC lenders or holders of a balloon loan, sign to acknowledge the priority shift.
To better understand the financial and legal implications of a subordination agreement, consider the following key points:
- Assessing financial stability is crucial before considering subordination.
- Comparing loan terms is essential to make an informed decision.
- Consulting with financial advisors can help homeowners make informed decisions about mortgage subordination and refinancing options.
- A subordination agreement involves a legally binding document.
Legal Considerations
Mortgage subordination involves a legal process, where lien holders agree to rearrange the priority of their liens. This is typically facilitated through a subordination agreement, a legally binding document that secondary lien holders, like HELOC lenders or holders of a balloon loan, sign to acknowledge the priority shift.
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To obtain a subordination, you'll need to provide documentation, including the terms of the new loan, loan approval, and refinance loan application. The HELOC lender may also request a Refinance Loan Estimate (LE) form, FHA- or VA-specific documents, income verification, appraisal, title, and a fee.
A subordination real estate mortgage clause gives the loan it's in reference to first lien position, stating that any other loans or liens on the property take a second lien position. Most first mortgage lenders won't fund a loan unless there is a subordination clause giving them first lien position.
There's a chance the HELOC or home equity loan lender could refuse to re-subordinate their loan, such as when your credit or financial picture has worsened since you got the HELOC, or you're taking cash out thereby increasing the loan-to-value beyond the HELOC lender's maximum.
Here are some common reasons a HELOC lender may deny subordination:
- Your credit or financial picture has worsened since you got the HELOC
- You are taking cash out thereby increasing the loan-to-value beyond the HELOC lender's maximum
- The HELOC lender doesn’t like the terms of the new loan: it has a balloon payment, adjustable-rate feature, or an interest-only option.
- You’ve moved out of the home since you got the HELOC
- The HELOC was originally in first position
Financial Considerations
Before considering subordinate financing, it's essential to assess your financial health and stability. This means evaluating your ability to manage additional monthly payments. Homeowners should thoroughly review their budgets and financial obligations to ensure they can handle the added expense.
Comparing loan terms is crucial when evaluating subordinate financing options. This includes comparing interest rates, terms, and potential risks. It's also essential to consider the flexibility that subordinate loans offer, allowing homeowners to access equity in their homes without refinancing their primary mortgage.
Your lender may charge a subordination fee, which can range from $50 to $500 or more. This fee is typically charged by your HELOC lender to work up the subordination agreement. To clarify, this fee is separate from your refinance lender's fees and should be included in the subordination request.
To make informed decisions about mortgage subordination and refinancing options, it's highly recommended to consult with financial advisors. They can help you weigh the pros and cons of subordinate financing and determine if it's the right choice for your financial situation.
Examples and Impact
Subordination agreement mortgage can be a complex and nuanced concept, but let's break it down with some real-life examples.
In the event of a foreclosure, the mortgage lender would be paid back first, while the HELOC lender would be paid last, receiving only cents on the dollar.
Individuals often encounter subordination agreements with mortgages, and it's not uncommon for homeowners to take out new mortgages to refinance their old ones.
The HELOC lender would normally move up into the first lien position, but the lender of the new mortgage may insist on a subordination agreement, which the HELOC lender may accept in return for a fee.
Subordinate financing, including second mortgages and HELOCs, can be used to leverage equity in a home for various purposes, such as home improvements or debt consolidation.
In the case of bankruptcy, an individual's senior debts would be paid off ahead of any junior or subordinated debts, and the person's stockholders would likely receive nothing in the liquidation process.
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Examples

Homeowners often take out a home equity loan, which becomes a subordinate loan, taking a secondary position to the primary mortgage. This means the primary mortgage lender gets paid off first from any foreclosure proceeds.
A business filing for bankruptcy will have its assets liquidated, and senior debt holders will be paid in full before subordinated debt holders, who may only receive cents on the dollar.
In the event of an individual's bankruptcy, senior debts are paid off ahead of junior or subordinated debts, such as alimony and child support.
A person with both an original mortgage and a home equity line of credit (HELOC) on the same property will have the mortgage with the first lien, and the HELOC lender will have a second lien.
A home equity line of credit (HELOC) lender may have to accept a subordination agreement when a new mortgage is taken out to refinance the old one, in exchange for a fee.
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A subordinate mortgage loan is any loan not in the first lien position, and the subordination order goes by the order the loans were recorded.
If you take out additional financing, such as a home equity loan or home equity line of credit, it usually falls into the second or third lien position.
Most lenders won't allow a newly refinanced loan to fall into the second lien position, which is why they often require a subordination agreement from the existing HELOC lender.
Impact on Payments
Managing multiple monthly payments can be a real challenge, especially for homeowners with subordinate financing. They need to juggle both the primary mortgage and subordinate loan payments, which can lead to financial strain and increased risk of default. Failing to meet these payments can have serious consequences.
Homeowners with subordinate financing need to be careful with their budgeting to ensure all payments are met. This requires a close eye on finances and a solid plan for managing debt.
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Refinancing and Closing
Refinancing a mortgage can be a smart financial move for homeowners, but it often requires navigating the complexities of subordination.
You'll need to secure subordination agreements from any subordinate lien holders to maintain the lien priority order. This is crucial to ensure that your loan approval isn't jeopardized.
The order of subordination changes when you refinance your first mortgage. The subordination falls in order of the time each loan is recorded.
Most lenders won't allow the first mortgage to take a lower lien position, so you'll need to get the second mortgage holder to agree to subordinate. This is often a condition of loan approval.
Frequently Asked Questions
Why would someone get a subordinate mortgage?
A subordinate mortgage is often used when a homeowner wants to refinance their primary loan, allowing the second lender to remain in a secondary position on the property. This arrangement is typically necessary to secure refinancing for the primary loan.
Sources
- https://www.newwestern.com/glossary/subordination-clause/
- https://seascapecapital.com/blog/mortgage-subordination/
- https://www.mortgageresearch.com/articles/heloc-subordination-agreement-for-refinance/
- https://www.investopedia.com/terms/s/subordination-agreement.asp
- https://www.quickenloans.com/learn/understanding-mortgage-subordination
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