A subordination agreement refers to a legal contract that adjusts the priority of liens or claims over a particular property. This agreement is usually used in situations where multiple loans exist on a specific property. A subordination agreement helps lenders to agree on how their respective interests will be handled when the property is sold or foreclosed.
In real estate, a subordination agreement is often used when a homeowner wants to refinance their mortgage. In this situation, the new lender may require the subordination agreement as a condition of the loan. The agreement would allow the new lender to have a first lien on the property, while the existing lender would have a second lien. It prevents the existing lender from taking over the first position, which could lead to a mortgage default.
In simple terms, a subordination agreement lays out the order of payback in the event of a default or when the property is sold. This ensures that all parties involved are clear on how they will be paid back and the order in which they will receive their share once the property is sold or foreclosed. In most cases, the agreement is signed by the creditors and the debtor.
Subordination agreements can also be used for other types of loans, including car loans and personal loans. For example, if a borrower has two car loans, the subordination agreement would determine the priority of payment in case of a default. Similarly, a personal loan subordination agreement may be used to set the order of payment for loans that have been co-signed.
In conclusion, a subordination agreement is an essential legal document that is used to adjust the priority of liens or claims over a particular property. It helps resolve disputes between lenders and ensures that all parties involved are clear on how they will be paid back. It is essential to consult with a legal expert to draft a subordination agreement that protects all parties` interests.