Contract Glossary
Subordination Agreement
Definition
A subordination agreement is a legal document that establishes the priority ranking of debts or claims against a property or asset. It allows a debt that was recorded earlier to be moved behind a newer debt in priority. This is most common in real estate, where a first mortgage holder agrees to subordinate their lien to a new loan, effectively moving to second position. Subordination agreements are critical in refinancing, construction lending, and commercial real estate transactions.
In Practice
A homeowner has a first mortgage with Bank A and wants to refinance their second mortgage with Bank B at a lower rate. Bank B requires a first-position lien. Bank A signs a subordination agreement, agreeing to let Bank B's new loan take first position while Bank A moves to second. Bank A agrees because the homeowner's equity is sufficient to secure both loans, and the total debt is actually decreasing due to the refinance.
Example Clause
Subordinating Lender hereby agrees that its lien and security interest in the Property, recorded as Document No. [Number] in the [County] County Recorder's Office, shall be subordinate and junior to the lien and security interest of Senior Lender's Deed of Trust securing a loan in the principal amount of $[Amount]. This subordination shall be effective regardless of the order of recording.
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Frequently asked questions about subordination agreement
A lender might agree to subordination if: (1) the borrower's equity provides sufficient security even in second position, (2) the total debt load is decreasing (refinance), (3) the new senior loan benefits the property's value (construction loan), or (4) as a condition of an ongoing commercial relationship. Lenders are compensated for subordination risk through higher interest rates or fees. They can also refuse — there's no obligation to subordinate.
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Create your contractThis content is for informational purposes only and does not constitute legal advice. For contracts with significant financial or legal implications, review by a qualified attorney is recommended.