Subordination: Key Insights into Debt Prioritization and Agreements

Q: Why would I need to subordinate a loan?

You might need to subordinate a loan if you are seeking additional financing and the new lender requires it to secure their loan.

Q: Can I subordinate my mortgage on my own?

While you can initiate the process, it is advisable to consult a legal professional to ensure all necessary steps are taken correctly.

Definition & Meaning

Subordination refers to the process of ranking debts or claims in order of priority. When a property owner has an existing loan secured by their property and seeks a new loan, the original loan may need to be subordinated. This means that the new loan will take priority over the original loan. For instance, if a homeowner wants to obtain a second mortgage for renovations, they typically need to ensure that the first mortgage is subordinated to allow the new loan to have first claim on the property. Additionally, a declaration of homestead must also be subordinated to any loans against the property.

Table of content

Legal Use & context

Subordination is commonly used in real estate and finance law. It is particularly relevant in situations involving mortgages, where multiple loans are secured against a property. Legal professionals often draft subordination agreements to clarify the priority of claims among creditors. This term is significant in civil law, especially in matters involving property rights and secured transactions. Users can manage some aspects of this process themselves by utilizing legal templates available through US Legal Forms.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A homeowner wishes to renovate their kitchen and applies for a second mortgage. The lender requires that the existing first mortgage be subordinated, allowing the new loan to take precedence in case of default.

Example 2: A small business has multiple loans. The business owner agrees to a subordination agreement with a new lender, ensuring that the new loan will be paid first before any other existing debts are settled. (hypothetical example)

State-by-state differences

Examples of state differences (not exhaustive):

State	Subordination Rules
California	Allows subordination agreements to be recorded with the county.
New York	Requires specific language in the subordination agreement to ensure enforceability.
Texas	Subordination must be executed in writing and may require notarization.

This is not a complete list. State laws vary, and users should consult local rules for specific guidance.

Comparison with related terms

Term	Definition	Difference
Subordination	Ranking debts or claims by priority.	Focuses on the order of payment among creditors.
Subrogation	Right of one party to step into the shoes of another.	Involves transferring rights to collect on a debt, rather than changing priority.
Priority	Legal right to collect debts before others.	General concept of order, while subordination is a specific agreement.

Common misunderstandings

What to do if this term applies to you

If you find yourself needing to subordinate a loan, consider the following steps:

Review your existing loan agreements to understand the terms.
Consult with a legal professional to draft a subordination agreement that meets your needs.
Explore US Legal Forms for templates that can simplify the process.
If your situation is complex, seeking legal advice is highly recommended.

Find the legal form that fits your case

Browse our library of 85,000+ state-specific legal templates.

This field is required

Quick facts

Attribute	Details
Typical fees	Varies by lender and state; may include processing fees.
Jurisdiction	Applicable in all states, but specific laws may vary.
Possible penalties	Default on loans can lead to foreclosure or loss of property.

Key takeaways

Frequently asked questions

What is a subordination agreement?

A subordination agreement is a contract where a creditor agrees that their claim will be paid after another creditor's claim.