What is a Subordination Clause in Real Estate?

What is a Subordination Clause?

In real estate, a subordination clause is a legal agreement which allows a current claim or lien to take a lower priority than others listed against a property. This is most commonly used in the context of mortgages, where a subordination clause might permit a new mortgage to take precedence over an existing one in terms of lien priority. This is crucial in situations where a property owner wants to refinance their primary mortgage. Without subordination of a second mortgage (like a home equity line of credit), the new primary mortgage could not become the first lien against the property, complicating the refinancing process. This clause helps lenders and borrowers manage the hierarchy of claims on a property, ensuring that primary lenders are paid first in the event of a sale or foreclosure.

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