Subordination AgreementCredit Repair Definition
A legal contract establishing that one debt or lien ranks behind another debt or lien in priority.
Definition
A subordination agreement is a legally binding contract that establishes the priority between two different debts or liens against the same collateral or borrower. In this agreement, one creditor (the subordinating party) agrees that their debt or lien will rank lower in priority ('subordinate') to the debt or lien of another creditor (the senior party). This means that if the borrower defaults or the collateral is sold, the senior creditor must be paid in full before the subordinated creditor receives any payment. Subordination agreements are crucial in financing situations involving multiple layers of debt, such as second mortgages, mezzanine financing, or intercreditor relationships, as they formally define the order of repayment and rights to collateral.
Frequently Asked Questions
What is the purpose of a subordination agreement?
Its main purpose is to alter the default lien priority (usually based on recording time) to satisfy the requirements of a senior lender. For example, a new first mortgage lender will require any existing junior liens (like HELOCs) to formally subordinate via an agreement so the new mortgage maintains first priority.
Who are the parties to a subordination agreement?
Typically, the agreement is between the subordinating creditor (who agrees to take a lower priority position) and the senior creditor (who benefits from the higher priority). The borrower may also be a party or may need to consent.
Is a subordination agreement recorded?
Yes, subordination agreements related to real estate liens are typically recorded in the public land records to provide official notice to third parties about the agreed-upon lien priority.
Related Terms
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