Understanding Mortgage Subordination

6 Min Read
Updated Dec. 14, 2023
Written By
Sam Hawrylack
Bungalow house on spring day.

If you have more than one mortgage on your property, each loan has a lien position. This means if you default on your loan, the liens are paid in order of importance.

If you want to refinance, you’ll need mortgage subordination for any other mortgages on the property. It sounds complicated and possibly even something to keep you from refinancing, but the process is simple.

As the borrower, you don’t have to do much about subordination. However, you should understand how they work and what not having a subordination agreement can do to your loans.

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What Is Mortgage Subordination?

A mortgage subordination refers to the order the outstanding liens on your property get repaid if you stop making your mortgage payments. For example, your first home loan (primary mortgage) is repaid first, with any remaining funds paying off additional liens, including second mortgages, HELOCs and home equity loans.

The only exception to the first mortgage taking first lien position rule is any tax liens. Typically, the IRS and any local taxes, such as property taxes, take the first lien position and will not subordinate even when you refinance.

What Is A Subordinate Mortgage Loan?

A subordinate mortgage loan is any loan not in the first lien position. The subordination order goes by the order the loans were recorded. For example, your first mortgage (the mortgage used to buy the house) is recorded first because it’s the first loan you borrow.

If you take out additional financing, including when you buy the home, the financing usually falls into the second or third lien position. This includes loans like home equity lines of credit and home equity loans.

Second mortgage and HELOC lenders know they are taking a second lien position when they lend you the money.

However, when you refinance your first mortgage, your newly refinanced loan could fall into the second lien position, which is something most lenders won’t allow.

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What Are Mortgage Subordination Clauses?

A subordination real estate mortgage clause gives the loan it’s in reference to first lien position. It states that any other loans or liens on the property take a second lien position. Most first mortgage lenders won’t fund a loan unless there is a subordination clause giving them first lien position.

Typically, the subordination clause is only necessary when you refinance your mortgage. Like we said above, when you refinance, the loan automatically goes into the last lien position, behind any other loans or liens on the property.

First mortgage lenders won’t accept this, though, requiring a subordination clause and the other mortgage or lien holders to agree to subordinate to the newly refinanced loan.

What Are Subordination Agreements?

A subordination agreement is an agreement with any second mortgage, HELOC or other lienholders to subordinate their debt to the primary mortgage. Again, you don’t have to worry about creating or executing this agreement, but you’ll likely see it at the closing.

Without the other lien holders agreeing to subordinate their liens, a first mortgage lender won’t close on your loan.

For example, say you have a first mortgage and a HELOC. You want to keep the HELOC open because it’s your emergency fund, but you have the chance to refinance your first mortgage at a lower rate.

The refinanced loan naturally falls into the second lien position when you refinance. But the lender will likely require a subordination agreement with your HELOC lender to put the HELOC in second position and the newly refinanced loan in first position.

How Subordination Impacts Homeowners

Typically, you won’t have to worry about subordination as it happens behind the scenes with lenders. It’s common practice, and most lenders accept the agreement without issue. But there are some ways subordination may affect you.

It May Increase Your Rates

Mortgage lenders base their rates on the risk they take when lending you money. First mortgage lenders have the least risk because they have a first lien position. Since most lenders only lend to qualified borrowers after due diligence, their risk of default is low, and if you default, they get first ‘dibs’ on the funds when the house sells.

Second mortgage lenders, however, are at a much higher risk. While they do the same due diligence, they are automatically in second lien position. This means they may see only a part or none of the money they lent you if you default on the loan.

Because of the higher risk, second mortgage lenders may charge higher interest rates. The higher interest rates pay the lender more money while you’re making your payments, and if you default, they’ll at least have the extra interest you paid while you made your payments.

Subordination Order Changes As You Refinance

When you refinance your first mortgage, the order of subordination changes. As we said earlier, the subordination falls in order of the time each loan is recorded.

When you refinance, you pay off the lien in the first position and take out another loan. Since it’s recorded after any HELOCs or second mortgages you already have in place, the first mortgage would naturally take a lower lien position.

Most lenders won’t allow this, so this could cause you to lose your loan approval if the second mortgage holder won’t agree to subordinate.

It May Delay Your Loan Closing

A subordination agreement is usually a funding condition when you refinance. Some second mortgage and HELOC lenders execute them immediately, while others go through a lengthy process.

If your first mortgage lender doesn’t send out the agreement early in the process, it could delay your loan closing. You can do nothing during this process but stay in touch with your loan officer. If either lender requires more documentation or signatures from you, ensure you provide them immediately so you can get to the closing table on time and not lose your locked rate.

The Bottom Line

A mortgage subordination is a part of the process when borrowing multiple loans. Borrowers typically don’t have to do anything to execute the agreement or get lenders to subordinate the loan.

Having multiple loans on your property could affect your interest rates and possibly delay your closing if all parties aren’t on board. But, for the most part, you’ll never know anything about the subordination until you get to the closing table.

You’ll only deal with the term if you refinance your loan. If you’re considering refinancing,  and see how easy it is to get the necessary subordination agreements to close your loan.

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