Are you trying to refinance your mortgage, but were told that you need a subordination agreement first? If so, that means you have two mortgages on your property. If you refinance the first mortgage, it can put the second mortgage in first lien position. That leaves the new 1st mortgage lender in second place and that’s not where they want to be.
So what’s entailed in the agreement and how do you get it? Let’s look.
How do Liens Work?
When you bought your home, you borrowed money to do so. That money is in the form of a first mortgage. The lender has priority lien or first lien on your property. If you default on your loan, the first mortgage holder gets priority payment from the proceeds when the home sells. If you took out a second loan somewhere along the way to use your home’s equity, you now have a second lien. This lender is second in line for payment should you default on the loan.
The only exception to this rule is any tax liens or other government liens placed on your property. These liens end up in first position because of their superiority. If you have a tax lien on your property (unpaid taxes) they get paid first and then any mortgage companies receive payment.
Typically, mortgages take on their lien position based on the order they are recorded. Your purchase mortgage gets recorded first and gets first priority. The home equity loan or line of credit gets recorded after that date and takes second lien.
What is a Subordination Agreement?
When you pay off your first mortgage, the second lien automatically takes first position by default. In the case of a refinance, the moment you pay off your first mortgage with the proceeds of the new loan, the second lien takes first position. This leaves the new lender in 2nd position, not where they want to be.
In order to avoid this, your new mortgage company will require the second mortgage holder to sign a subordination agreement. This is just an agreement that states the second lienholder will stay in second position even though they would get first position by default. This allows the new mortgage to take first lien position despite the later recording date.
How to Get the Subordination Agreement
The subordination agreement isn’t an automatic thing. Your second mortgage company doesn’t have to sign the agreement. This would leave you without the chance to refinance, though. There are ways you can improve your chances of getting the agreement:
- Make your loan payments on time. If you have a history of making your payments late, the lender may be unwilling to take a backseat position to a mortgage that has a later recording date. You need to show the lender that you are not a risk for default so they will agree to subordinate.
- You’ll have to ask the lender for the subordination as well as what requirements they have. Some lenders have specific requirements that go beyond the need to have a timely payment history. Find out your lender’s requirements to see if you can meet them.
What to do If Your Lender Won’t Subordinate
If your second mortgage lender will not subordinate for one reason or another, you have two options:
- Cancel the refinance and keep everything as it is now. If you don’t pay off your first mortgage, no one loses their lien position and everything carries on as normal.
- Take a cash-out refinance and pay off the second lien. If you have the room in your equity and you can qualify for a cash-out refinance, you can combine both loans into one large loan, giving that loan first lien position.
The subordination agreement is important if you want to refinance and you have a second mortgage. Make sure to allow plenty of time for the lender to go over the agreement and decide if they will approve it or not. Typically, you don’t have to do too much work when it comes to the subordination paperwork, though. Your lenders usually handle it, but it’s not a bad idea to stay involved.