What is a subordination agreement, and why does it matter?

July 06, 2020

Refinancing your home comes with its fair share of paperwork. If you have a home equity loan or line of credit, one document may feel particularly daunting: the subordination agreement. Sounds scary, right? Don’t worry. Subordination agreements are a normal part of the refinancing process.

Let’s walk through the basics of subordination, using a home equity line of credit (HELOC) as our primary example. Keep in mind that these concepts still apply if you have a home equity loan.

 

What is subordination?

Subordination is the process of ranking home loans (mortgage, HELOC or home equity loan) by order of importance. When you have a home equity line of credit, for example, you actually have two loans – your mortgage and HELOC. Both are secured by the collateral in your home at the same time. Through subordination, lenders assign a “lien position” to these loans. Generally, your mortgage is assigned the first lien position while your HELOC becomes the second lien.

 

Why does subordination matter?

In a foreclosure, your mortgage and HELOC must be paid off with the equity in your home. Unfortunately, a home’s equity cannot always cover the full cost of both loans. Subordination addresses this problem with pre-established lien positions.

The first lien is always paid off first. (In this case, that’s your mortgage.) Equity can only be allocated to pay off the second lien once your mortgage is paid in full. If there were a third lien, it would be paid off after the second lien. And so on.

When there’s not enough equity to cover what’s owed on your second lien, the HELOC lender loses money. Subordination cannot magically pay off loans, but it does help lenders estimate risk and set appropriate interest rates.

 

How does subordination affect refinancing?

Refinancing is the process of paying off your old mortgage and replacing it with a better one. When your mortgage is paid in full, the second lien (HELOC) automatically bumps up in priority. Your HELOC becomes the first lien, and your new mortgage becomes the second lien.

Unsurprisingly, mortgage lenders don’t like the risk associated with a second lien. A subordination agreement allows them to reassign your mortgage to first lien and your HELOC to second lien position.

 

What can you expect?

Most subordination agreements are seamless. In fact, you may not realize what’s happening until you’re asked for a signature. Other times, delays or fees may take you by surprise. Here are a few important notes about the subordination process.

  • Subordination agreements are prepared by your lender. The process occurs internally if you only have one lender. When your mortgage and home equity line or loan have different lenders, both financial institutions work together to draft the necessary paperwork.
  • Some financial institutions charge a subordination fee and/or other fees, such as appraisal fees.
  • Delays can occur, especially if you have two lenders. We encourage you to manage this situation to ensure that your subordination agreement is completed before the loan closing date.
  • Your home equity loan or HELOC may be frozen or closed temporarily until the subordination agreement is processed.

 

Make your home refinance possible

Despite its technical-sounding name, the subordination agreement has one simple purpose. It assigns your new mortgage to first lien position, making it possible to refinance with a home equity loan or line of credit. Signing your agreement is a positive step forward in your refinancing journey.

 

 

If you have questions about subordination, we’re here to help. Make an appointment with us today.

Related content

These small home improvement projects offer big returns on investment

Hybridization driving demand

Webinar: Mortgage basics: Finding the right home loan for you

What type of loan is right for your business?

How to fund your business without using 401(k) savings

Dear Money Mentor: What is cash-out refinancing and is it right for you?

Can ABL options fuel your business — and keep it running?

How to get started creating your business plan

The lowdown on 6 myths about buying a home

Collateral options for ABL: What’s eligible, what’s not?

ABL mythbusters: The truth about asset-based lending

10 ways to increase your home’s curb appeal

What’s the difference between Fannie Mae and Freddie Mac?

Changes in credit reporting and what it means for homebuyers

3 signs it’s time for your business to switch banks

4 small business trends that could change the way you work

Common small business banking questions, answered

Are you ready to restart your federal student loan payments?

3 tips for saving money when moving to a new home

Pros and cons of a personal line credit

For today's homebuyers, time and money are everything

Why other lenders may be reaching out to your employees

5 tips to use your credit card wisely and steer clear of debt

How to build and maintain a solid credit history and score

How to improve your credit score

6 essential credit report terms to know

Leverage credit wisely to plug business cash flow gaps

Avoiding the pitfalls of warehouse lending

4 benefits of independent loan agents

A checklist for starting a mobility program review

Middle-market direct lending: Obstacles and opportunities

High-cost housing and down payment options in relocation

At your service: outsourcing loan agency work

Maximizing your infrastructure finance project with a full suite trustee and agent

How to maximise your infrastructure finance project

How jumbo loans can help home buyers and your builder business

Prioritizing payroll during the COVID-19 pandemic

How to establish your business credit score

5 tips to help you land a small business loan

Streamline operations with all-in-one small business financial support

How to establish your business credit score

Opening a business on a budget during COVID-19

When to consider switching banks for your business

What are conforming loan limits and why are they increasing

What is a good credit score?

For today's relocating home buyers, time and money are everything

Crypto + Relo: Mobility industry impacts

Evaluating interest rate risk creating risk management strategy

Tech lifecycle refresh: A tale of two philosophies

5 steps to selecting your first credit card

Beyond Mars, AeroVironment’s earthly expansion fueled by U.S. Bank

Credit: Do you understand it?

What types of credit scores qualify for a mortgage?

Test your loan savvy

Webinar: Mortgage basics: What’s the difference between interest rate and annual percentage rate?

How do I prequalify for a mortgage?

Can you take advantage of the dead equity in your home?

Home equity: Small ways to improve the value of your home

Webinar: Mortgage basics: How much house can you afford?

8 steps to take before you buy a home

Is a home equity line of credit (HELOC) right for you?

Webinar: Mortgage basics: 3 Key steps in the homebuying process

Webinar: Mortgage basics: Buying or renting – What’s right for you?

How to use your home equity to finance home improvements

Webinar: Mortgage basics: What is refinancing, and is it right for you?

Should you get a home equity loan or a home equity line of credit?

5 things to avoid that can devalue your home

6 questions to ask before buying a new home

What is refinancing a mortgage?

What is an escrow account? Do I have one?

Quiz: How prepared are you to buy a home?

10 questions to ask when hiring a contractor

What to know when buying a home with your significant other

Webinar: Mortgage basics: How does your credit score impact the homebuying experience?

What is a home equity line of credit (HELOC) and what can it be used for?

Dear Money Mentor: When should I refinance a mortgage?

Are professional movers worth the cost?

First-time homebuyer’s guide to getting a mortgage

How I did it: Bought my dream home using equity

Saving for a down payment: Where should I keep my money?

Is it the right time to refinance your mortgage?

Overcoming high interest rates: Getting your homeownership goals back on track

Money Moments: How to finance a home addition

Home buying myths: Realities of owning a home

How to use credit cards wisely for a vacation budget

Should you buy a house that’s still under construction?

Dear Money Mentor: How do I begin paying off credit card debt?

10 uses for a home equity loan

Know your debt-to-income ratio

Your guide to breaking the rental cycle

Is a home equity loan for college the right choice for your student

How to apply for federal student aid through the FAFSA

What to consider before taking out a student loan

Common unexpected expenses and three ways to pay for them

How I did it: Paid off student loans

The A to Z’s of college loan terms

Costs to consider when starting a business

Questions to ask before buying a car

Should you give your child a college credit card?

Webinar: Mortgage basics: Prequalification or pre-approval – What do I need?

Your financial aid guide: What are your options?

How liquid asset secured financing helps with cash flow

An investor’s guide to marketplace lending

What is a CLO?

How you can take advantage of low mortgage rates

Buying a home Q&A: What made three homeowners fall in love with their new home

Personal loans first-timer's guide: 7 questions to ask

Myth vs. truth: What affects your credit score?

Improving your credit score: Truth and myths revealed

Decoding credit: Understanding the 5 C’s

6 ways to spring clean your finances and save money year-round

What you should know about buying a car

What you need to know before buying a new or used car

Take the stress out of buying your teen a car

How to choose the best car loan for you

Practical money skills and financial tips for college students

5 unique ways to take your credit card benefits further

5 tips to use your credit card wisely and steer clear of debt

Co-signing 101: Applying for a loan with co-borrower

What’s a subordination agreement, and why does it matter?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

What’s your financial IQ? Game-night edition

How to use debt to build wealth

How to build credit as a student

Money Moments: Tips for selling your home

How I did it: My house remodel

Everything you need to know about consolidating debts

Student checklist: Preparing for college

Webinar: Uncover the cost: College diploma

How I did it: Bought a home without a 20 percent down payment

Crypto + Homebuying: Impacts on the real estate market

Your quick guide to loans and obtaining credit

4 questions to ask before you buy an investment property

Good debt vs. bad debt: Know the difference

Parent checklist: Preparing for college

U.S. Bank asks: What do you know about credit?

Evaluating interest rate risk creating risk management strategy

Disclosures

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.