Subordination agreements can help to establish a clear lien position hierarchy. This can be useful in the event of debt repayment scenarios like foreclosure. The need for a subordination agreement may arise when there are multiple loans on a property.
A subordination agreement is a legal document that establishes one debt as ranking behind another in priority for collecting repayment from a debtor. The priority of debts can become extremely important when a debtor defaults on their payments or declares bankruptcy.
Subordination agreements are used to legally establish the order in which debts are to be repaid in the event of a foreclosure or bankruptcy. In return for the agreement, the lender with the subordinated debt will be compensated in some manner for the additional risk.