What is a Mortgage Subordination Clause?

The term “subordination clause” comes to mind when you buy a home or take out a loan. This can look puzzling, but it's just a law that helps decide which debt is paid off first if you are unable to make payments or sell your home.

What a subordination clause is, why it matters, and what it means to you will all be explained in simple terms in this article.

What is a Subordination Clause?

A subordination clause is a part of a loan agreement that shows the order in which loans get paid back.
Many people have more than one loan on their home. For example:

• The first loan to buy the house (called the first mortgage).
• A second loan, like a home equity loan or line of credit.

The subordination clause says which loan is paid back first if you sell your house or can’t pay your loans.

Usually, the first loan you took out is paid first. If there isn’t enough money to pay all loans, the loans taken later may not be fully paid.

Why is the Subordination Clause Important?

The subordination clause is important because it helps lenders know who gets paid first. It also affects your ability to get new loans or change your current loan.
Here’s why it matters:

1. Shows Which Loan Gets Paid First
It makes clear who is first in line to get their money back if the house is sold or taken away.

2. Helps You Get New Loans
If you want to change your first loan (called refinancing), the new lender wants to be first in line. The lender of your second loan has to agree to move back in priority. This is called signing a subordination agreement.

3. Shows Your Risk
If you sell your house for less money than you owe, the loan that is second loan might lose some or all the money. Knowing the order helps you understand this risk.

How Does a Subordination Clause Work? A Simple Example

Imagine you have two loans on your house:

• First loan: $200,000
• Second loan: $50,000

If you sell your house for $230,000, the first loan is paid first. That leaves $30,000 to pay the second loan.

If you sell your house for only $180,000, the first loan lender gets all the money, and the second loan lender might get nothing.

Now, if you want to refinance your first loan to get a better deal, the new lender wants to be first in line. The lender of your second loan must agree to stay second by signing a subordination agreement.

Without that agreement, refinancing may be difficult or more expensive.

When Do You Need a Subordination Clause?

You will see a subordination clause when:

Refinancing Your First Loan
If you want to replace your first loan with a new one, the new lender wants to be first. The second lender must agree to move behind the new loan.

Getting a Second Loan
If you take out a second loan after your first, it will usually be the second because of this clause.

Buying a House with More Than One Loan
The clause helps decide who gets paid first if there are multiple loans.

What is a Subordination Agreement?

A subordination agreement is a written promise from the lender of your second loan to stay behind the new or first loan.

This promise is important when refinancing because the new lender wants to be sure they get paid first.

How Does This Affect You?

Knowing about the subordination clause can help you:

• Understand the order of your loans
• Plan if you want to refinance or take out a new loan
• Avoid surprises about which loan gets paid first

Without a subordination agreement, your new loan might be second, which can cost more or be harder to get.

Things to Remember

• Not all loans have a subordination clause.
• The second lender must agree to a subordination agreement, but usually, they do.
• Being second in line can make a loan riskier and more costly.

What If My Second Lender Refuses to Stay Behind When I Refinance?

If the second lender doesn’t agree, your new loan might become the second loan instead of the first. This can make it harder or more costly to refinance because lenders usually want to be the first to get paid.

A subordination clause is a simple rule that shows which loan gets paid first on your home. If you have more than one loan or want to refinance, it affects how your loans work.

Learn about the subordination clause with your lender before refinancing or getting a new loan. Being mindful of this will allow you to make smart choices and stay away from problems.