When it comes to financing a property, particularly in the case of mortgages, there are times when the lender may require a subordination agreement. This legal document is necessary when a borrower wishes to refinance or obtain a second mortgage on their property. But who prepares a subordination agreement, and what does it entail? In this article, we’ll explore the key details of subordination agreements and highlight who is responsible for drafting them.

What is a Subordination Agreement?

First, let’s define what a subordination agreement is. Essentially, it’s a legal agreement that establishes a lender’s claim on a specific property as subordinate to another lender’s claim. The main purpose of a subordination agreement is to determine which lender’s claim takes priority in the event of a borrower defaulting or going into foreclosure. In other words, if a borrower fails to pay back their loans, the lender with the higher priority on the property will be paid first.

Who Prepares a Subordination Agreement?

Typically, the lender with the first mortgage will initiate the process of drafting a subordination agreement. This lender holds the primary claim on the property and is responsible for granting a subordinate position to any subsequent loans. The borrower seeking a second mortgage or a refinancing should approach the primary lender with a request for a subordination agreement. The primary lender will then work with the borrower and the subsequent lender to draft a subordination agreement that will protect all parties’ interests.

What Does a Subordination Agreement Entail?

Subordination agreements are complex legal documents that require the input and expertise of a lawyer. The agreement should contain the following information:

– The legal description of the property

– Details of the primary mortgage, including the remaining balance and the interest rate

– Details of the subordinate loan, including the amount and the interest rate

– A clause specifying the order of priority between the lenders

– Signatures from all parties involved, including the borrower, the primary lender, and the subordinate lender

Once the subordination agreement is signed, it becomes binding and legally enforceable. It’s crucial that all parties involved understand the terms outlined in the agreement before signing it.

Conclusion

In conclusion, subordination agreements are legal documents that are typically drafted by the primary lender when a borrower seeks a second mortgage or refinancing. They outline the order of priority between lenders in the event of a borrower defaulting or going into foreclosure. As a professional, it’s important to highlight that subordination agreements are complex legal documents that should only be drafted by a lawyer. They require a great deal of attention to detail, and any errors or omissions could lead to serious financial consequences for all parties involved.