Subordination Agreement for Liens

Subordination Agreement for Liens

A subordination agreement for liens is an essential legal document that allows lenders to protect their interests in case of a borrower default. This agreement enables a primary lender to maintain its priority position despite the presence of secondary lien holders. In this article, we will explore the basics of subordination agreements and how they work.

What is a subordination agreement?

A subordination agreement is a legal document that governs the priority of liens on a specific piece of property in case of default or foreclosure. This agreement allows a primary lender to maintain its priority position, regardless of the presence of secondary lien holders.

For example, if a borrower has two mortgages on their property and defaults on their payments, the first mortgage holder has the right to collect their debt from the sale of the property before the second mortgage holder receives their share. This is because the first mortgage holder has the primary lien, while the second mortgage holder has the secondary lien.

However, a subordination agreement can change this order. In the case of a subordination agreement, the primary lender agrees to subordinate its lien position to a secondary lien holder, effectively moving the primary lender to a secondary lien position. This means that the primary lender would collect their debt only after the secondary lien holder has been paid in full.

Why is a subordination agreement necessary?

A subordination agreement is necessary when a borrower has multiple loans on their property. In such cases, lenders are interested in ensuring that their interests are protected. The primary lender in such situations benefits the most by having the subordination agreement in place, as it allows them to maintain their priority position during foreclosure proceedings.

Additionally, a subordination agreement can benefit the borrower as well. By enabling the borrower to get additional funding, they can use their equity more effectively and obtain better loan terms.

How does a subordination agreement work?

A subordination agreement is a legal agreement between lenders that outlines the priority of their liens. The document specifies that the primary lender is willing to subordinate its lien position to a secondary lien holder. This agreement can be negotiated between the lenders or between the borrower and the secondary lien holder.

Once the agreement is drafted and signed by all the concerned parties, it is recorded in the public records of the county where the property is located. This ensures that all parties involved in the property`s sale are aware of the agreement`s terms.

Conclusion

A subordination agreement for liens is a vital document that allows multiple lenders to work together to protect their interests. This agreement is especially useful in situations where a borrower has multiple loans on their property. A well-crafted subordination agreement can give lenders peace of mind and ensure that they get paid what they are owed. If you are a lender or borrower, it is essential to work with an experienced attorney in drafting a subordination agreement that is appropriate for your specific situation.