How Does a Mortgage Subordination Agreement Work?

First of all, what in the world is a mortgage subordination, and what is a mortgage subordination agreement?

When you have two mortgages on a property, one must be subordinate to, or behind, the other. This all comes down to who gets paid first in the event that the property goes into foreclosure and needs to be sold. Any time there is more than one mortgage on a property, a subordination agreement must be put into place to clarify who will be in what is called “first position.”

Typically, on a home with two mortgages, the more traditional (as in a 15- or 30-year fixed mortgage) will be in first position, then the second mortgage (which could be a home equity loan or line of credit) will be in second.

One lender may carry both the first and second mortgages on a property, but in many cases, a lender may want to limit their exposure on a property by holding only one of the mortgages.

The second mortgage may be taken out at the same time as the first or at some later date. A subordination agreement would also be needed, for example, if you had both a first and a second mortgage and wanted to refinance only the first mortgage.

In this case, the new first mortgage lender would have to create a subordination agreement with the lender of the existing second. Without this, the lender of the second mortgage could move into first position after the original first mortgage is paid off.

So why would any lender want to stand in line behind another? Because second mortgage lenders can charge higher interest rates than first mortgage lenders.

Please let me know if I can answer any additional questions you have about how mortgage subordination and subordination agreements work. I’m always here to help.