Different liens on the same property usually have priorities according to the time of their creation. To achieve the subordination of a prior lien, there must be an actual agreement to that effect.
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When you get a mortgage loan, the lender will likely include a subordination clause essentially stating that their lien will take precedence over any other liens placed on the house. A subordination clause serves to protect the lender if a homeowner defaults.
A Subordination Agreement focuses on creditor priorities and security claims, providing legal certainty to creditors when assessing repayment risk. If a credit event (or default) occurs, a subordination agreement provides a senior lender superior repayment rights than the subordinated lender.
Subordination is a way of changing the priority of claims against a debtor so that one creditor or group of creditors (the junior creditor(s)) agree that their debt will not be paid until debts owed to another creditor or group of creditors (the senior creditor(s)) have been paid.
First lien debt holders are paid back before all other debt holders, including other senior debt holders. A lien is the legal right of a creditor to seize property from a borrower that has failed to repay the creditor. The creditor may exercise the lien by selling the property if the loan is not paid back.
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.
A mortgage subordination refers to the order the outstanding liens on your property get repaid if you stop making your mortgage payments. For example, your first home loan (primary mortgage) is repaid first, with any remaining funds paying off additional liens, including second mortgages, HELOCs and home equity loans.
Key Learning Points. Lien subordination takes place when two or more senior tranches of debt each have a lien on the collateral, but one tranche has first priority while the second has a residual claim. These are referred to as first lien and second lien.
Lenders can execute what are referred to as executory subordination agreements. Executory subordination agreements are essentially a promise to enter into a subordination agreement in the future if another loan enters the picture, like a construction loan.
If a homeowner has a first mortgage, home equity lines of credit and home equity loans are examples of subordinate loans. They will be paid second in the event of a foreclosure or cash sale.
A subordinate mortgage loan is any loan not in the first lien position. The subordination order goes by the order the loans were recorded. For example, your first mortgage (the mortgage used to buy the house) is recorded first because it's the first loan you borrow.
