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Image of Brady Bell - Bellhaven Blog Author

Written by: Brady Bell

Published Dec 4, 2024

"Doing my best to make real estate easy to understand for the average Joe."

3 min

9 sec read

Glossary Term

Law and Contracts Category Image
Law and Contracts Category Image
Law and Contracts Category Image
  1. 1.What is a Subordination Agreement in Real Estate Lending?
    2.How Subordination Agreements Work
    3.Key Players in Subordination Agreements
    4.Benefits and Risks
    5.Common Types of Subordination Agreements
    6.The Subordination Process
    7.Common Challenges and Solutions
    8.Legal Considerations
    9.Frequently Asked Questions
    10.Tips for Success
    11.Conclusion

What is a Subordination Agreement in Real Estate Lending?

I love explaining complex real estate topics in simple terms, and subordination agreements are something every property owner should know about. These agreements play a huge role in real estate lending, yet many people scratch their heads when they hear the term. Let's clear up the confusion!

Subordination Agreement: A subordination agreement is a legal document where one lienholder agrees to give up their superior position to another lienholder on a property. This agreement effectively changes the order in which lienholders would be paid if the property is sold or foreclosed upon, typically allowing a new mortgage to take priority over existing liens.

How Subordination Agreements Work

Think of lien priority like a line at your favorite coffee shop - whoever gets there first gets served first. That's the "first-in-time" principle in real estate. But sometimes, someone needs to cut in line (legally, of course). That's where subordination agreements come into play.

You might need one when:

  • Refinancing your home to get better interest rates

  • Opening a home equity line of credit

  • Getting a construction loan for property improvements

Key Players in Subordination Agreements

Several people need to be on the same page for these agreements to work:

  • Primary lender (usually your main mortgage company)

  • Secondary lender (like a home equity loan provider)

  • You, the property owner

  • Title companies who make sure everything's legal

  • Real estate attorneys who review the paperwork

Benefits and Risks

Let's talk about what's good and what's tricky about subordination agreements.

Benefits for property owners:

  • Access to better loan terms through refinancing

  • Ability to tap into home equity

  • More flexibility with your property's financing

Risks to watch out for:

  • Secondary lenders might lose their investment if foreclosure happens

  • The process can be time-consuming

  • Some lenders might refuse to subordinate

Common Types of Subordination Agreements

Not all subordination agreements are created equal. Here are the main types you'll run into:

Automatic Subordination: The easiest kind - it happens automatically under certain conditions. Conditional Subordination: The lender only agrees if specific requirements are met. Partial Subordination: Only part of the original loan gets moved to second position.

The Subordination Process

Getting a subordination agreement isn't like picking up milk at the store. Here's what happens:

  • You submit a request to your current lender

  • The lender prepares the agreement

  • Both lenders review and negotiate terms

  • Everyone signs the paperwork

  • The agreement gets recorded with your county

Common Challenges and Solutions

I've seen plenty of bumps in the road with subordination agreements:

  • Lenders taking their sweet time to respond

  • Missing or incorrect paperwork

  • Title problems that need fixing

  • Back-and-forth negotiations that seem endless

Legal Considerations

The legal stuff matters - a lot. Each state has its own rules about:

  • How agreements must be written

  • Where they need to be recorded

  • What happens if someone defaults

  • Who has what rights

Frequently Asked Questions

Q: When do I need a subordination agreement?

A: Most often during refinancing or when taking out a second mortgage.

Q: Who pays for it?

A: Usually the borrower, but this can be negotiated.

Q: Can a lender say no?

A: Yes, they're not required to subordinate their position.

Q: How long does it take?

A: Typically 2-4 weeks, but it can take longer.

Tips for Success

Make your life easier by:

  • Getting all your documents ready before applying

  • Following up regularly with all parties

  • Reading everything carefully before signing

  • Planning for the process to take some time

Conclusion

Subordination agreements might seem complicated, but they're just tools that help make real estate financing more flexible. They're super important for refinancing and getting the most value from your property.

Need help navigating subordination agreements? Bellhaven Real Estate's experts can guide you through every step. We make complex real estate processes simple and straightforward for our clients.

Related terms

Related terms

  1. 1.What is a Subordination Agreement in Real Estate Lending?
    2.How Subordination Agreements Work
    3.Key Players in Subordination Agreements
    4.Benefits and Risks
    5.Common Types of Subordination Agreements
    6.The Subordination Process
    7.Common Challenges and Solutions
    8.Legal Considerations
    9.Frequently Asked Questions
    10.Tips for Success
    11.Conclusion

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