In which case is a subordination agreement typically used?

In which case is a subordination agreement typically used?

• A. When the first mortgage becomes delinquent
• B. When a newer mortgage needs priority over an existing mortgage
• C. When negotiating lease terms
• D. When selling a property

Answer: (B)

A subordination agreement is typically used when a newer mortgage needs to take priority over an existing mortgage. This legal document modifies the priority of claims on the property, allowing a subsequent lender to have a higher claim to the asset than an earlier lender. This situation often arises when a property owner seeks additional financing after obtaining an initial mortgage and needs to assure the new lender that their mortgage will be first in line in the event of foreclosure or default. This arrangement can make it easier for the property owner to secure a second mortgage since lenders may be more willing to lend if they hold the primary lien. The clarity of this agreement helps protect the interests of the new lender by affirming that their claim will be superior to any older debts attached to the property.

A subordination agreement is typically used when a newer mortgage needs to take priority over an existing mortgage. This legal document modifies the priority of claims on the property, allowing a subsequent lender to have a higher claim to the asset than an earlier lender. This situation often arises when a property owner seeks additional financing after obtaining an initial mortgage and needs to assure the new lender that their mortgage will be first in line in the event of foreclosure or default.

This arrangement can make it easier for the property owner to secure a second mortgage since lenders may be more willing to lend if they hold the primary lien. The clarity of this agreement helps protect the interests of the new lender by affirming that their claim will be superior to any older debts attached to the property.