Alright pupils, you’ve been diligent in your mortgage studies. We crawled, we waddled, and now we’re full-on walking through the world of home loans. You’ve been doing your homework diligently and it shows! After last week’s lesson you probably feel like valedictorian of Home Loan High School, with a full ride to the mortgage college of your choice. Well stop it! Neither of those schools exist, and we’ve barely even started to learn everything you need to know about mortgages. If you honestly thought you were acing home loan high (again, not real) then consider today’s Know Your Mortgage an advanced-placement class. Today, we open our huge (metaphorical) text books and wrap our heads around the fascinating world of subordination.
Good question. Mortgage subordination, often called a subordination agreement, is a reference to a second mortgage a homeowner is attempting to get.
Hold Up, You Can Get a Second Mortgage?
Sure, it was a heck of a lot easier in the late 90’s and early 2000’s, but if a homeowner has a good payment history, great credit, and well-established equity, that homeowner could get approved for a second mortgage and use it for what they need.
So, What Is a Second Mortgage Used For?
A bunch of different things; it’s ultimately the lender’s call to whether or not that “thing” is safe enough for them to lend on. For example, no one’s going to want to give you a second loan if it’s for a bender in Vegas, or you’re really interested in that new Ponzi scheme everyone’s getting in to. They do, however, usually approve a second mortgage for plenty of things: Affording care for a dependent, education costs, transportation, and emergency medical payments. But they are most commonly used for home remodeling, improvements or additions because it’ll raise the value of the house in the long run.
When Does Subordination Get Into All of This?
Subordination has to deal with the order in which the loans are paid if a second mortgage is taken out. For a more in-depth explanation, heed the word of subordination experts/Quicken Loans employees, James Prince and Tina Bryant:
“Every loan (or lien) a client takes out on a certain property has a certain lien position. Lien positions on title are based on the dates that loan transactions are closed. The first lien taken out on a property will be considered the first lien on the property, the next lien taken out (while the first still exists) will be the second lien, and so on. If a client keeps an existing second mortgage open (instead of paying it off) while closing a first mortgage with us, the second mortgage would normally move up to first position over ours (because ours has been taken out after theirs). We want to be in first position so we ask the lender who holds the second mortgage (second lien holder) to subordinate, and let us take first lien position.”
Normally, whichever loan is put in the second position will have a higher interest rate to adjust for getting pushed down the payment chain. The important thing to remember is that the main reason people subordinate a loan is they have more than one lien on their title, but not all of their liens are being paid off with the first loan.
Anything Else I Should Know About Subordination?
Have your ducks in a row if you plan on subordinating a loan. Some banks require very specific documents to be signed in order for the subordination to be completed, with very long turnaround times (30+ business days sometimes) that cannot be rushed. Also, if you have home equity line of credit (HELOC) set up, the bank may require you to lower your credit line for subordination.
Pencils down! Test booklets in. If you’ve fully grasped the concept of subordination, you’ve gotten that much closer to getting your highly (fictional) regarded mortgage masters. Seriously though, if there ever were an advanced placement class of mortgage knowledge, subordination would certainly be covered. If you have any lingering questions on the topic, comment below.