Subordination agreements apply to mortgage customers who have more than one mortgage on a property.
For example, if you had a mortgage on your home, then decided to get either a home equity loan or a line of credit, the new mortgage would be subordinated to the first mortgage.
In mortgage terminology, the subordination agreement would put the original mortgage in what is called first position. This means if the owner of the property defaults and the property must be sold, the lender in first position would be paid back first. The lender of the second mortgage would be paid back second, if the property sale generates enough funds.
This is why the mortgage rate on a second mortgage is often higher than the rate on the first. The second lender is taking a risk that there might not be enough funds available to pay back the loan in a default situation.
To take this a step further, if a homeowner has two mortgages and wants to refinance just the first mortgage, the homeowner would have to get a new subordination agreement signed by the original second lender before doing so.
This is to keep the second mortgage in second position. Otherwise, the once-in-second-position mortgage would move to first position, and no first mortgage lender would ever allow themselves to become subordinated under a second mortgage.
If you have additional questions about this agreement or the process for obtaining a second mortgage, contact your mortgage professional for details.