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What Is Subordination Of Line Position | How Subordination Works In Real Estate Explained - YouTube
Channel: Trevor Calton
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if you've ever heard the term
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subordination in real estate and you're
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not sure what it is or how it works keep
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watching
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this is trevor and in this video i'm
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here to teach you about subordination
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how it works what it's used for why it's
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necessary and who uses it i'll also give
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you an example so if you have any
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questions just leave me a note in the
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comments below and don't forget to
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subscribe this information is critical
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for any real estate or mortgage
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professional to understand as well as
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anyone looking to refinance their
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property especially when they have two
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mortgage loans such as a 30-year home
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loan and a home equity line of credit
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after this video you'll understand how
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subordination agreements work how
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they're executed who are the parties
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involved and what you need to know when
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dealing with one in order to understand
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how subordination works first we need to
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understand the concept of lien position
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when somebody takes out a mortgage loan
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the lender records a lien on the
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property this lien creates a public
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record that pledges the property as
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security or collateral on the loan when
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a property has multiple liens such as in
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the case of a home mortgage loan and a
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home equity line of credit the liens are
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prioritized in order of when the lien
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was recorded a lien that was recorded
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first is considered a senior lien and
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any liens recorded after that are
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considered junior liens so what does
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this matter well in the event of
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foreclosure or bankruptcy if the
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property has to be sold
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the proceeds from that sale that are
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used to pay off the creditors are paid
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in order of lien position so the senior
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lender gets paid first and then if there
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are any proceeds left over then the
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first junior lien holder will get paid
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and so on after the senior lender's been
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paid if there aren't enough proceeds to
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satisfy the lien for the junior lender
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the lien is extinguished and the junior
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lean holder needs to pursue other means
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to collect from the borrower this is the
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reason why second mortgages usually have
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a higher interest rate than a first
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mortgage because the second lien holder
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needs to be compensated for the higher
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risk due to their junior lean position
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subordination comes into play when a
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borrower wants to refinance their first
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mortgage after a second mortgage or a
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home equity line has been put in place
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let's use an example of a homeowner who
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takes out a 30-year fixed-rate loan then
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a couple years later
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they take out a home equity line of
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credit let's say after a few years the
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borrower wants to refinance their
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30-year loan with a new loan because say
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interest rates went down if the borrower
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wants to refinance their original loan
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then the new loan would technically now
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be junior to the home equity line of
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credit typically the new lender is not
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going to want to take a junior position
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when refinancing the original senior
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loan so what they do is when they go to
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pay off this loan they have the junior
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lien holder sign a
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subordination agreement
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that effectively takes the junior lien
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and puts it junior to the new loan which
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now becomes the senior debt now that the
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home equity line of credit has been
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subordinated to the new loan the new
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lender who is refinanced will be first
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lean position and will be first in line
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to get paid in the event of foreclosure
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or bankruptcy most subordination
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agreements are pretty seamless and
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standard people refinance their
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mortgages all the time so junior lenders
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or home equity lenders are quite
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accustomed to subordinating to that new
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senior debt
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if they refused to subordinate
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people would either be more hesitant to
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borrow from these lenders who are in the
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business of making loans or they would
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get paid off
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by the borrower and then they would be
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forced to go find a new borrower to
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redeploy that capital it actually serves
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them better to subordinate to the new
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senior loan so they're back in the same
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position that they were before and
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they're still earning that higher rate
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of interest that they were often times
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when a subordination is happening if the
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original lender and the home equity
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lender are the same institution the
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borrower doesn't even really know what's
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happening until they're required to sign
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the subordination agreement along with
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the lenders at the closing of the
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refinance however it's quite common that
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the
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new lender and the home equity line of
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credit lender are different in that case
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the two institutions will have to
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collaborate on the subordination
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agreement and work together to draft the
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paperwork some lenders might charge a
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subordination fee or other fees or
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possibly even require a new appraisal
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when those two lenders are different
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companies quite often delays can occur
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so it's important as a borrower to
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understand that a subordination
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agreement needs to be signed and help
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make sure that that process goes
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smoothly by communicating with both
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lenders and making sure that they are
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aware of what their responsibilities are
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so let's recap those steps when borrower
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takes out their first loan a senior lien
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is recorded
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when they take out their second loan
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such as in the home equity line a junior
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lien is recorded
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when the borrower wants to refinance the
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senior loan with a new loan
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the new lender requires the junior lien
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holder to sign a subordination agreement
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when that new lien is recorded the
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subordination agreement is recorded as
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well
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and so the
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home equity lender is now once again in
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the junior position and the refinance
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lender is in the senior position if you
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found this video helpful please like and
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subscribe and i have a whole library of
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real estate finance and investment
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courses online for investors real estate
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and mortgage professionals or anyone
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else looking to improve their skills in
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real estate finance and you can find
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those at
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evergreen.courses this is trevor thanks
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for watching
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you
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