What Is the Purpose of the Subordination Agreement

What Is the Purpose of the Subordination Agreement

A subordination agreement is a legal document that outlines the priority of liens on a property. This agreement is essential for parties involved in a real estate transaction, including lenders, borrowers, and potential buyers. In this article, we`ll discuss the purpose of a subordination agreement and why it`s important to have one in place.

The purpose of a subordination agreement is to establish the priority of liens on a property. This is especially important in cases where there are multiple liens on a property, such as in a refinancing situation or a foreclosure. The subordination agreement outlines the order in which liens will be paid off, ensuring that all parties involved are aware of their level of priority.

For example, let`s say that a homeowner has a first mortgage on their property, and they want to refinance their mortgage to get a better interest rate. The new lender will require a subordination agreement from the first mortgage lender to ensure that the new mortgage takes priority over the existing one. This means that in the event of a foreclosure, the new mortgage lender will be paid off before the first mortgage lender.

Subordination agreements can also be used in commercial real estate transactions. In these cases, there may be multiple lenders involved, each with their own lien on the property. A subordination agreement can help ensure that all parties involved are aware of the priority of their lien and can make informed decisions about the transaction.

In addition to establishing the priority of liens, subordination agreements can also include provisions related to payments, fees, and other financial obligations. This ensures that all parties are clear on their financial responsibilities and can avoid disputes in the future.

Overall, the purpose of a subordination agreement is to establish the priority of liens on a property and ensure that all parties involved understand their financial obligations. This document is essential in any real estate transaction that involves multiple liens, and it`s important to have an experienced attorney review and draft the agreement to ensure that it meets the needs of all parties involved.