Lien SubordinationCredit Repair Definition
An agreement where one lienholder allows their lien to rank behind another lienholder's claim on the same property.
Definition
Lien subordination is the process or agreement by which a creditor holding a lien on a property (the subordinating lienholder) voluntarily agrees to lower the priority of their lien relative to another creditor's lien (the senior lienholder) on the same property. Essentially, the subordinating lienholder allows their claim to be paid after the senior lienholder's claim is satisfied if the property is sold. This is often accomplished through a subordination agreement. A common scenario is when a homeowner refinances their first mortgage; the lender holding the second mortgage or home equity line of credit (HELOC) must typically agree to subordinate their lien so that the new refinanced first mortgage retains its senior priority position.
Frequently Asked Questions
Why would a lienholder agree to subordinate their lien?
A junior lienholder (like a second mortgage lender) often agrees to subordinate to facilitate a transaction that benefits the property owner and potentially improves the overall security, such as refinancing the first mortgage at a lower interest rate. Refusing subordination might prevent the refinancing, potentially increasing the risk of default on both loans.
What is a subordination agreement?
A subordination agreement is a legally binding contract between two creditors and sometimes the borrower, where one creditor explicitly agrees to make their lien junior in priority to the other creditor's lien. This agreement is typically recorded in public records to provide notice of the altered lien priority.
Does subordination affect the amount owed?
No, subordination only affects the priority of payment from collateral proceeds in case of sale or foreclosure. It does not change the amount of debt owed to either the senior or the subordinated lienholder.
Related Terms
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