A voluntary lien subordination agreement is a formal, legally binding document where a lender holding a senior lien on a property agrees to subordinate, or move behind, another lender’s lien. This agreement is essential in scenarios where homeowners refinance their mortgage or take on new loans, such as a home equity line of credit (HELOC), on the same property.
Understanding Lien Priority
Lien priority determines the order in which lienholders are paid if the property is sold. The general rule is “first in time, first in right,” meaning the first lender to record a lien holds the highest priority. Subsequent liens are junior to earlier ones. When refinancing, the new lender usually requires first-priority lien status to protect their investment.
Typical Use in Mortgage Refinancing
For example, if you have a first mortgage and a HELOC, the HELOC lender holds a second lien position. When you refinance your primary mortgage with a new lender, that lender wants the first lien position. To make this happen, the HELOC lender must sign a voluntary lien subordination agreement, accepting a junior (second) position behind the new mortgage.
Why Lenders Agree to Subordinate
Lenders agree to subordination because a refinance often leads to lower payments, reducing the risk of borrower default, which benefits all lenders. Additionally, subordination is standard lending practice and helps maintain good relationships in the lending and title company communities. Lenders may also charge a fee for processing the subordination.
Important Considerations
- Timing: Obtaining subordination can delay closings by several weeks—start early.
- Fees: Expect fees typically ranging from $50 to $500.
- Denial Risks: Lenders can deny subordination requests, especially if the refinance increases their risk significantly.
Other Applications
Besides mortgage refinancing, subordination agreements may also be necessary for construction loans or in rare cases, federal tax liens where the IRS agrees to allow subordination to facilitate refinancing or new loans.
For more details on related topics, see our articles on Mortgage Lien Subordination and IRS Lien Subordination Requests.
Sources
- IRS Certificate of Subordination of Federal Tax Lien – irs.gov
- Investopedia: What Is a Subordination Agreement? – investopedia.com
- NerdWallet: What Is a Subordination Agreement in Real Estate? – nerdwallet.com
