What is a subordination agreement?

A subordination agreement is a legal document that establishes the hierarchy of liens on a property. Specifically, it allows a junior lien, such as a second mortgage, to take precedence over an existing lien, typically a first mortgage. This can be important for lenders when refinancing or adding additional borrowing; by allowing the junior lien to take precedence, the borrower can secure new financing or modify existing loans without jeopardizing the interests of the existing lenders.

In real estate transactions, these agreements are crucial when different stakeholders have financial interests in the property and need to clarify the order in which they will be compensated in the event of a foreclosure. The ability to shift the priority among liens enables greater flexibility in securing funding and can facilitate development projects or help property owners manage their finances more effectively.