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What Is A Subordinate Mortgage? Subordination in itself is the act of placing something in a lower-ranking position. Mortgage subordination boils down to a ranking system on the liens secured by your home. A lien is a legal agreement that grants the lender a right to repossess the property if you default on the loan.
Two types of subordination agreements are: Executory Subordination and Automatic Subordination. These differ in the timing of when priority rights are given and the contractual performance required by the subordinated party.
A subordination agreement must be signed and acknowledged by a notary and recorded in the official records of the county to be enforceable.
To adjust their priority, subordinate lienholders must sign subordination agreements, making their loans lower in priority than the new lender. A subordination agreement puts the new lender into first position and reassigns an existing mortgage to second position or third position, and so on.
The creditor usually will require the debtor to sign a subordination agreement which ensures they get paid before other creditors, ensuring they are not taking on high risks.
A Subordination Agreement is a legal document that establishes the priority of liens or claims against a specific asset.
Payment subordination establishes the hierarchy of interest and principal payments in case of default or liquidation. Senior debt is paid first, followed by junior debt. Lien subordination does not imply payment subordination. In the case of default, payments must continue to be made to all senior lenders equally.
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.