Written By: Hina Habib
Subordination agreement a written contract in which a lender who has secured a loan by a mortgage or deed of trust agrees with the property owner to subordinate the first loan to a new loan (thus giving the new loan priority in any foreclosure or payoff). The agreement must be acknowledged by a notary so it can be recorded in the official county records.)
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In simple words Subordination means going in the second position or after the first. Whenever you hear this term that means there is a second mortgage on the property. Lot of people has second mortgage and equity line on their property which was either pulled at the time they were buying the house or after they purchased the house.
Subordination term comes in when any borrower tries to refinance their first mortgage and keep the second mortgage open. They cannot complete the refinance process until they receive the subordination agreement from the lender holding second mortgage. Now in some cases when a borrower has equity in the property, they payoff first and second both via refinancing, subordination is not required.
For the borrowers who have first and second mortgage and does not have equity to pay off the second mortgage, subordination is a must. Hence this is recommended that if anyone plans to refinance with keeping second mortgage open, they should call the second mortgage lender, to make sure that they will do the agreement. If the lender refuses to do the subordination then first loan cannot be refinanced, as if they will do so without the required agreement, they will go in the second position and lender with second mortgage will be able to exercise all the rights as a First mortgage.
In the current market situation 90% of loans with second mortgage does not have equity in the property and require subordination. Now when subordination is used then loan to value is based on lender guidelines. Most of the lenders allow 95%CLTV, Combined loan To Value between the first and second mortgage. In case of HARP program CLTV has no limit. And in case of FHA it is 105%
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Now that rates are low, many people are going through the refinance process and subordination(s) are a common occurrence. It can be tricky to get subordination approved, if you have a second mortgage compare to an equity line.
In the last few years though, this is good news for the Homeowners that guidelines have relaxed for the subordination process too.
About The Author
Hina Habib - As an NAMP® staff writer, Hina Habib has been working as a Loan Processor with mortgage industry for more than 15 years now. Hina is a loan processing instructor for Loan Processor University (www.LoanProcessorTraining.org). She has ample experience of structuring and processing FHA, VA and Conventional loans. She worked with an established Correspondent Lender/ Mortgage Broker for 13 years. After her promotion as a Senior Loan Processor she trained loan officers and other processors. Currently she is working with a strong and established banking institute as a Mortgage Processor II. She is very well informed with the current on going changes in the mortgage history and can help answer your questions more accurately. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
