What makes a mortgage a subordinate mortgage loan? Aren’t all mortgages created equal? The long and short of it is that the first mortgage that gets recorded on your title is the senior lien holder; any mortgage that gets recorded after that point is a subordinate lien.
How the First Lien Works
The money you borrow to purchase your home is the first lien position on your title. Any lender that loans you money after that, using your home as collateral, will take second or third lien position. This means that the first mortgage or first lien position, will always get paid first before any other liens. This is why in most cases, you will see a higher interest rate or less favorable terms on a second mortgage. The junior mortgage holder is in a riskier position and they need to make up for that.
Why Lenders Take Second Lien Position
It is a matter of default for second lienholders to take the lower position. They go into the process knowing that they will be second. As stated above, this is why you pay more for these loans. However, these lenders also know what to look for in borrowers in order to know what is a good risk and what is not.
The second mortgage holder wants someone that has great credit and the ability to keep up with their payments. This means a low debt-to-income ratio. The mortgage lender needs some type of reassurance that they will get paid back despite being in the junior lien position.
Resubordinating a Second Loan
Sometimes, you can even find cases where the subordinate mortgage holder needs to subordinate again. When the second mortgage was first taken out, the lender knew they were taking the lower position. If the opportunity comes up to refinance your first mortgage into a lower interest rate or from an ARM to a fixed rate, the junior mortgage holder might have to subordinate again. If you plan to keep the 2nd mortgage untouched, this is the case and most times the lender is willing to do so, assuming you have a solid payment history on your mortgage.
The Value is the Most Important Thing for a Subordinate Mortgage
The one thing that any subordinate mortgage loan lender wants to see is adequate value in the home. This is usually pretty obvious when you try to take out a second mortgage for the first time. Whether you need the money to purchase the home or take it out at a later date, you need adequate value in the home to take the equity out of it with a second mortgage.
Where the value comes even more into play is when you need to resubordinate the loan. By default, the second lienholder takes the first position when you pay off the first lien. If you refinance your first mortgage, that is what you are doing – paying off the first mortgage. Because no lender will provide primary financing without having first lien position, the second mortgage holder needs to agree to subordinate again. This is generally not a problem since the mortgage company already had a lower lien position. However, if there is not adequate value in the home, they might have a problem. If the value of your home decreased, the junior loan holder might not want you to refinance because their chance of getting paid if you were to default is much lower than it was before.
A subordinate mortgage loan is not a bad thing and can often be helpful if you need more money to purchase a home. When it becomes a problem is when you want to refinance, yet leave that second mortgage alone. As long as you have adequate equity in the home and a good payment history, most lenders will continue to subordinate. If not, your only option would be to keep both mortgages as they are right now or refinance both mortgages into one, called a consolidation loan. The value in your home will really determine what your choices are when it comes to purchasing, refinancing, and taking out second mortgages on your home.
Before you take out a second mortgage, give it careful thought to ensure this is what you want as it will be a lien on your property for the next 20 to 30 years.