What Is a Subordinated Loan Agreement?

Real estate rights and interests just usually boil down to priority and timing. The subordinated loan agreement allows interest holders to change the general principles of priority by allowing a second-in-time creditor to take priority on a first-in-time lender. In essence, the poor loan arrangement reverses the general rules of mortgage priority on a specific item of property.


Real estate law is a matter of sorting out claims . The general legal principle is that the first person to maintain any interest or right in a parcel of property has the first interest or right to that property. By way of instance, the first mortgage lender to take a lien on property includes a superior lien into another mortgage lender that also takes a subsequent lien on precisely the exact same property.


The subordinated loan agreement will identify three or more different parties, including the first mortgage creditor, the next mortgage lender and the home owner. The agreement will also recognize the collateral, that is the real property securing the mortgages. The first creditor subordinates its mortgage to the next lender’s mortgage .


A subordinated loan agreement typically allows home owners to fund improvements on their home at times when the general rules of priority would not allow the owner to do so. Many mortgage lenders won’t provide a mortgage loan unless they have a first lien on the collateral. The subordinated loan agreement makes it possible for a new creditor to take a first lien despite the fact that the creditor wasn’t first in time.


It may seem uncharacteristic for a first mortgage lender to consent to a subordinated loan agreement because this places the initial lender in another lien position. But if the collateral is desperate and repayment on the initial mortgage doesn’t look great anyway, the initial lender could be enthusiastic about the chance for another creditor to provide extra capital to help improve the property to ensure both lenders can finally be repaid.


There’s not anything that legally takes a primary mortgage lender to consent to a subordinated loan agreement. Working out this agreement is purely a matter of bargain and negotiation.

Pro Insight

Sometimes a subordinated loan agreement doesn’t involve two mortgage lenders. By way of instance, a mortgage lender may agree to subordinate its loan into a lease on the collateral. That way, when the mortgage creditor ever forecloses on the collateral, the lease will survive the foreclosure.

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