A subordination agreement is a legal document that outlines the priority of liens on a property. Essentially, it is an agreement between two or more parties that establishes the order in which their claims will be paid in the event of a foreclosure.
In the context of real estate, a subordination agreement typically arises when a property owner has multiple loans or liens on their property. For example, a homeowner might have a first mortgage, a second mortgage, and a home equity line of credit. Each of these loans or liens has a claim on the property, but they may have different levels of priority.
If the homeowner defaults on their loans, the different creditors will be paid in order of priority. The first mortgage holder has the first claim on the property, followed by the second mortgage, and so on. A subordination agreement allows the parties to alter this priority, typically by agreeing to subordinate one or more liens to a higher-ranking lien.
For example, suppose a homeowner wants to refinance their first mortgage but has a second mortgage with a higher interest rate. The second mortgage holder may be willing to subordinate their lien to the first mortgage to make the refinance possible. This allows the homeowner to get a better interest rate on their first mortgage and saves them money in the long run.
Subordination agreements are common in commercial real estate transactions, particularly when the property is being sold or refinanced. They can also occur in the context of personal loans or other financial transactions. In any case, it is important to consult an attorney experienced in real estate law to draft and negotiate a subordination agreement.
In conclusion, a subordination agreement is a legal document that establishes the priority of liens on a property. It allows multiple creditors to agree to alter the order of payment in the event of a foreclosure, typically to facilitate a refinancing or other transaction. If you are involved in a real estate transaction, it is important to understand how subordination agreements work and to consult with an attorney experienced in this area of law.