If you are looking to invest in real estate, it is important to understand the concept of a subordination agreement. A subordination agreement is a legally binding document that rearranges the order of priority of two or more liens on a property. In simpler terms, it is an agreement between two lenders regarding their rights to a property in the event of a foreclosure.
A subordination agreement is typically used in situations where a property owner wants to take out a second mortgage or refinance their existing mortgage. In these cases, the new lender will want to have the first lien position on the property, which means they are first in line to be repaid in the event of a foreclosure. However, if there is already an existing mortgage on the property, that lender will have the first lien position.
To solve this issue, the two lenders can enter into a subordination agreement, which allows the new lender to take priority over the existing lender. This means that if the property owner defaults on their payments and the property goes into foreclosure, the new lender will be first in line to be paid off from the proceeds of the sale.
Subordination agreements can also be used in situations where a property owner wants to sell their property but there are multiple liens on the property. In this case, the subordination agreement can be used to specify the order in which the liens will be paid off from the sale proceeds.
It is important to note that not all lenders will agree to enter into a subordination agreement. The existing lender may not want to give up their first lien position, as it provides them with greater security in the event of a default. Additionally, the new lender may not be willing to enter into a subordination agreement if they feel that the risk of default is too high.
Overall, a subordination agreement is an important tool for real estate investors and property owners. By rearranging the order of priority of liens on a property, it can allow for greater flexibility in financing options and can help to ensure that all parties involved are protected in the event of a default. If you are considering taking out a second mortgage or refinancing your existing mortgage, it is important to speak with your lender about the possibility of entering into a subordination agreement.