What is a subordination agreement?

A subordination agreement is a legal document that establishes the priority of liens, particularly mortgages, on a property. When a later-recorded mortgage is given priority over an earlier recorded mortgage, it means that, in the event of foreclosure, the holder of the later mortgage could be paid first from the proceeds of the sale before the holder of the earlier mortgage. This type of agreement is typically used to refinance existing loans or to facilitate new loans, where a lender may require a subordinate position to secure additional funding.

By establishing a subordination agreement, lenders can work together to manage their interests in the property, especially if new financing is needed or if there are changes in the loan terms. This is significant in commercial real estate but can also arise in residential properties, particularly when a homeowner seeks refinancing or a second mortgage. The possibility of one mortgage lender agreeing to a subordinate position is crucial for enabling homeowners and property developers to access financing options without losing the property to foreclosure.