A subordination agreement is a legal document that is often used in the real estate industry. It is an agreement between two mortgage holders that allows one mortgage to take priority over the other. This agreement is important when one property owner needs to refinance or take out a new loan.
So, what is a subordination agreement in real estate terms?
In simple terms, a subordination agreement is an agreement between two or more debt holders that defines the order of priority in which one debtor`s rights are superior to the other. In real estate terms, it is an agreement between two or more lenders that allows one lender to take priority over the other in the event of a foreclosure or default.
For example, let`s say a property owner has an existing mortgage on their property and wants to take out a second mortgage to pay for renovations or other expenses. The second mortgage would be subordinate to the first mortgage if a subordination agreement is in place. This means that if the property owner defaults on their payments, the first mortgage holder would have priority over the second mortgage holder in any foreclosure proceedings.
Subordination agreements are most commonly used when a property owner wants to refinance their mortgage. In this case, the new mortgage would take priority over the old mortgage, so the old mortgage holder must agree to subordinate their lien to the new mortgage. This ensures that the new lender has priority over the old lender in the event of a foreclosure.
It is important to note that subordination agreements can be complicated and require careful consideration. Before entering into a subordination agreement, it is important to obtain legal advice and ensure that all parties understand the implications of the agreement.
In conclusion, a subordination agreement is a critical legal document in the real estate industry. It ensures that lenders understand the order of priority in the event of a foreclosure or default. Property owners and lenders should take the time to consult with legal experts and ensure that all parties understand the implications of the subordination agreement.
