A subordination agreement changes the priority of loans and is commonly used in mortgages. It gives junior loans priority over senior loans, which is important in the event of foreclosure. The agreement must be written and signed by the creditors involved and may involve the debtor.
In general, if a borrower takes out multiple loans on a property or object, the older loan takes priority over the newer loans. If a borrower wishes to surrender an older loan to a newer loan, the creditors associated with each loan must enter into a subordination agreement. A subordination agreement is simply a legal document entered into between two or more parties who wish to change the legally established priority of loans.
In essence, a subordination agreement has the effect of giving a junior loan priority over a senior loan. This is especially important if an event such as a foreclosure occurs because a loan that has senior status is normally paid off in full before payments are directed to more junior debts. If multiple creditors have an interest in a property or object, a senior creditor may agree to subordinate some, but not all, of the junior creditors.
Subordination agreements are most commonly used in mortgages to change the lien holders’ priority on a property. They can also apply to other types of debt interest, such as leases or bank loans. Also, these agreements are sometimes used for water rights. For example, a senior water rights holder may give priority to a junior water rights holder through a subordination agreement.
A mortgage subordination agreement is typically entered into between two or more lenders who have made loans on a property through a mortgage or deed of trust. It often occurs when the homeowner has a first and second mortgage and wants to refinance the first mortgage. Before the refinance can take place, the lender associated with the first mortgage may require the lender associated with the second mortgage to sign a subordination agreement. By singing the deal, the second lender agrees that the refinanced loan will be the more senior loan.
If the property does eventually become the subject of foreclosure proceedings, any money recovered will first go to repay the loan with highest priority until it has been paid in full. Any remaining sum would then be applied to the subordinated loan. Most mortgage subordination agreements must be filed with the local land registry offices.
Generally, to be valid, a subordination agreement must be written and signed by the two creditors who intend to be bound by it. A debtor can also be made a party to the contract. In some cases, a subordination agreement is part of a larger contract. In this situation, it is usually referred to as a subordination clause.
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