Understand how mortgage loans are prioritized and what mortgage subordination means for borrowers.
During the mortgage process, you may come across the terms “First mortgage”, “Second Mortgage” or “First Position” and have wondered, what does it mean? And why does it matter? The type of mortgage you take out, be it a standard residential mortgage, a home equity line of credit (HELOC), or any other type of real estate backed debt has a “lien position”. The lien position dictates what debt gets paid off first in the event of a sale or a foreclosure.
Generally when the term “mortgage” is used, it connotes a first-lien position loan. Being that the first lien gets paid off first, rates on first mortgages are generally the lowest, as they pose the least amount of risk to the lender. Home equity loans are typically second position loans. Even if there is no first mortgage on the home, a home equity loan by itself is often referred to as a “stand-alone second”. Any debt secured against your home has a lien position that is recorded, meaning mechanic’s liens like a solar panel loan or housing grants also have lien positions on your home.
Lenders give preferential interest rates because the debt is secured against collateral: your home. So changes to the terms of their debt -- like refinancing the underlying first mortgage -- could impact the risk of the next position loans. The process of refinancing a first mortgage when there are other loans on the lien schedule requires something known as a subordination agreement.
What is mortgage subordination or a subordinate clause in a mortgage?
Owning a debt against your home gives lenders certain rights. A creditor who is subordinate (lower priority) to another lien on the home has the right of refusal. A lender in any lower lien position must agree to the new higher priority debt. Otherwise the lower priority debt will not accept the new debt and the loan cannot legally move forward. So when refinancing, it is important to determine if you are going to pay off the lower priority debt or apply for a re-subordination. A subordination application is submitted through your existing lender and can be as thorough as the first mortgage application!
Subordination agreements are drawn up by the lenders in order to ensure that they conform to both institutions’ internal requirements and processes. In some cases, you will be charged a fee for the preparation of the subordination agreement. The subordinating lender will often require an appraisal, so if you have received an appraisal waiver on your first mortgage, you may still have to get one. In addition, if you are subordinating a home equity loan or line of credit, the subordinate loan may be frozen while the agreement is prepared and executed. Lastly, subordination agreements are done on the existing creditor’s time schedule. It is common for loan applications to be delayed waiting for the subordination.
We hope you’re feeling more informed! And remember, Simplist offers the support you need to make a more informed decision. Begin your journey by scheduling time to chat with a licensed Simplist loan advisor, or by starting a streamlined, straightforward application process via our website. We’re all about making the mortgage process painless.