A Subordination Agreement is best described as?

A Subordination Agreement is best described as?

• A. An agreement that moves a second lien to first position during refinancing
• B. A contract to extend the loan term
• C. An agreement to reduce the interest rate on the first mortgage
• D. An agreement to release lien from property

Answer: (A)

Subordination agreements address who has the priority claim on a property when new financing is involved. When a new first mortgage is obtained through refinancing, existing liens often need to yield priority to that new loan. A subordination agreement is the contractual way for the lien holder of the existing second lien to agree to be in a lower priority position relative to the new first mortgage, so the new loan can take first place. That purpose—adjusting lien order during refinancing to allow the new first loan to be in the top position—is why this option is the best match. The other choices don’t deal with lien priority: extending the loan term, lowering the first mortgage rate, or releasing a lien.

Subordination agreements address who has the priority claim on a property when new financing is involved. When a new first mortgage is obtained through refinancing, existing liens often need to yield priority to that new loan. A subordination agreement is the contractual way for the lien holder of the existing second lien to agree to be in a lower priority position relative to the new first mortgage, so the new loan can take first place. That purpose—adjusting lien order during refinancing to allow the new first loan to be in the top position—is why this option is the best match. The other choices don’t deal with lien priority: extending the loan term, lowering the first mortgage rate, or releasing a lien.