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Subordination agreements are prepared by your lender. The process occurs internally if you only have one lender. When your mortgage and home equity line or loan have different lenders, both financial institutions work together to draft the necessary paperwork.
For instance, usually a trust deed incorporating a subordination agreement will state that the lien of the trust deed will, on recordation, automatically be junior to the lien of another trust deed, or it will state that the new loan and deed of trust will, without any other or further instrument of subordination, ...
The new lender prepares the subordination agreement in conjunction with the subordinating lienholder. Then, the parties typically sign the agreement. But in some cases, just the subordinating lender will need to sign the paperwork.
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.
Subordination agreements ensure that a primary lender will be paid in the event the borrower takes on more debt. As with most legal documents, subordination agreements need to be notarized in order to be official in the eyes of the law.
Contractual subordination is an arrangement where senior and junior loans are made to the same borrower (common debtor) but the senior creditor and junior creditor agree by contract priority of payment.
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.
Example of a Subordination Agreement A standard subordination agreement covers property owners that take a second mortgage against a property. One loan becomes the subordinated debt, and the other becomes (or remains) the senior debt. Senior debt has higher claim priority than junior debt.