Definition
Subordination is an agreement where a lienholder accepts a lower-priority position, allowing another lender's lien to take priority. For example, a second mortgage holder may subordinate to a new first mortgage refinance.
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Subordination is particularly relevant in refinances and when second mortgages are involved. A first mortgage takes priority over a second mortgage; if foreclosure proceeds are insufficient to pay both, the first lender is paid first. Subordination agreements allow lenders to agree to different priority positions than normal. For example, a second mortgage holder might agree to subordinate to a new first mortgage refinance, accepting a lower-priority position. Subordination is documented through legal agreements and recorded against the property.
Pro Tip
Subordination agreements are complex legal documents; ensure all parties understand priority positions before signing.
Example
A borrower wants to refinance with a new first mortgage; the existing second mortgage holder signs a subordination agreement, moving to third priority behind the new first mortgage.