Quick overview

A subordination agreement is a legal document that changes lien priority among creditors. Lien priority usually follows the order liens are recorded, but lenders can sign a subordination agreement to let a later loan take senior position. That choice influences closing approvals, interest rates, refinancing options, and recovery if the borrower defaults.

This article explains how subordination works in both mortgage and business contexts, practical steps borrowers should follow, common pitfalls, and how subordination interacts with tax liens and title recording. I draw on 15+ years advising mortgage borrowers and small businesses; my experience is noted where helpful. This content is educational—not individualized legal or tax advice (see disclaimer at the end).

Why priority matters

When a borrower defaults and an asset is sold or foreclosed, creditors are repaid in the order of lien priority. Senior creditors receive proceeds first; subordinate creditors take whatever remains (if anything). A subordination agreement lets a lender voluntarily move lower in that line so a new lender can become senior and provide financing that depends on senior status.

Priority affects:

  • Ability to obtain additional loans (e.g., second mortgages, construction loans).
  • Loan pricing: junior lenders charge higher rates because they shoulder more risk.
  • Refinance mechanics—some lenders require subordinations to refinance junior liens.
  • How tax liens (e.g., federal tax liens) interact with private mortgages—governed by federal rules for IRS liens.

Authoritative resources: see the Consumer Financial Protection Bureau for mortgage basics and closing processes, and the IRS guidance on requesting subordination of a federal tax lien (links below).

Background and legal basis

Lien priority is principally set by state recording statutes: the first properly recorded instrument typically has priority. That is known as the recording rule. However, parties with lien interests can change that order by signing a subordination agreement.

Types of subordination commonly encountered:

  • Voluntary subordination: a lender signs to allow another lender to have priority. This is the most common in mortgage and business financing.
  • Involuntary subordination: typically occurs by operation of law (e.g., bankruptcy) or when statutes require certain liens to take precedence.
  • Tax-lien subordination: the IRS may issue certificates of subordination in limited cases; the IRS has a formal process for requests.

State law controls many details, so lenders will often require title searches, title insurance endorsements, and recorded documents to make the change effective.

How subordination agreements work (step-by-step)

  1. Borrower requests financing that would be junior or senior to existing liens.
  2. New lender conditions approval on clear lien priority—sometimes insisting the new loan be in a specific position.
  3. Borrower asks the existing lienholder (often the first mortgage holder) to sign a subordination agreement so the new loan can take higher priority.
  4. The lender who agrees signs the subordination document; the agreement is usually recorded or paired with a title endorsement so title insurers and future lenders can rely on it.
  5. Title company or attorney disburses funds when required documents, endorsements, and recording are in place.

In my practice, the most common scenario is a homeowner seeking a second mortgage or HELOC while the first mortgage lender agrees to remain in first position by signing a subordination agreement. That signature often depends on debt-to-equity metrics, the loan-to-value ratio (LTV), and the borrower’s creditworthiness.

Real-world examples

Example 1: Second mortgage on a primary residence

  • A homeowner has a first mortgage recorded in 2018. In 2025 they apply for a HELOC. The HELOC lender asks the first mortgage lender to subordinate so the HELOC can be recorded as second. The first lender typically reviews the borrower’s payment history and current LTV before signing. If the first lender refuses, the HELOC lender can decline or charge a higher rate.

Example 2: Commercial property and equipment loan

  • A small business takes a mortgage on commercial property and later needs equipment financing. The equipment lender wants a lien on equipment and a junior lien on the property. The commercial mortgage lender may sign a subordination agreement allowing the equipment creditor to be junior. This protects the primary lender’s interest while allowing the business to expand.

Example 3: Tax lien subordination (IRS)

  • The IRS may subordinate its tax lien in certain cases (e.g., to allow a mortgage to close when the subordination increases the chance of full recovery). The IRS process is formal: taxpayers must provide documentation and meet criteria. See IRS guidance on requesting a subordination of a federal tax lien for details (irs.gov).

Who is affected or eligible

  • Borrowers: Anyone with multiple liens or seeking new financing where existing liens would affect priority. Subordination can unlock financing but may involve lender conditions or fees.
  • Senior lenders: Their willingness to subordinate depends on collateral value, borrower credit, and underwriting criteria. They may require title insurance endorsements or escrow protections.
  • Junior lenders: They rely on subordination to formalize their risk position and set pricing accordingly.
  • Investors and purchasers of distressed assets: They analyze subordination agreements to understand recovery prospects.

Practical considerations and professional tips

  1. Start early: Subordination negotiations can slow closings. Ask existing lenders about their policies before committing to a loan application.
  2. Provide strong documentation: Current payoff statements, property appraisals, payment histories, and updated title reports help persuade lenders to subordinate.
  3. Understand costs: Lenders sometimes charge administrative or title endorsement fees for subordination. Include these in your closing budget.
  4. Use title insurance endorsements: Ask for a title endorsement or recorded agreement to ensure third parties can rely on the new priority.
  5. Beware of automatic triggers: Some loan documents contain non-subordination clauses or restrictions—review loan covenants carefully and consult counsel if uncertain.
  6. Consider refinancing: If the first lender won’t subordinate, refinancing the first mortgage and paying off the junior lien (or reordering liens during refinance) can be an alternative.

In my advisory work I’ve found that proactive communication between lenders and a well-prepared title package often turns a hesitant subordination into an approval.

Common mistakes and misconceptions

  • “A signed subordination guarantees approval.” A subordination is only one part of underwriting; lenders still evaluate credit, LTV, and property condition.
  • “Recording date always controls.” Recording usually sets priority, but parties can change priority contractually by recording a valid subordination agreement.
  • “Subordination is free and quick.” It can require fees, endorsements, and legal review—plan time and cost.
  • “All liens can be subordinated.” Statutory liens (certain tax liens, mechanics’ liens) and bankruptcy outcomes sometimes limit or prevent voluntary subordination.

How subordination affects refinancing and sales

  • Refinancing: If you refinance the first mortgage, the junior lienholder’s position can be affected. Many refinances require the junior lender to sign a subordination or obtain a payoff. Lenders may demand reconveyance, payoff, or re-recording to maintain agreed priority.
  • Sale or foreclosure: In a sale or foreclosure, proceeds are distributed by priority. A subordinated lien is paid after seniors; understanding this outcome helps creditors price loans and borrowers assess risk.

Frequently asked questions

Q: Can a subordination agreement be revoked?
A: Generally, a properly executed and recorded subordination agreement is binding; revocation typically requires agreement by the parties or a legal event like lien payoff or restructuring. State law and contract terms matter.

Q: Will a lender always subordinate to a HELOC or home equity loan?
A: No. Lenders weigh LTV, borrower credit, and their internal policies. If the additional lien increases risk, they may refuse or impose conditions.

Q: Does the IRS ever subordinate tax liens?
A: Yes, in limited circumstances. The IRS has a process and specific criteria for issuing certificates of subordination. See the IRS page on requesting a subordination of a federal tax lien for eligibility and documentation requirements (irs.gov).

Related resources on FinHelp

  • Learn how lien priority works in practice on our “Mortgage Lien Subordination” guide: Mortgage Lien Subordination
  • If you’re deciding between home equity options, see “Home Equity Options: HELOC vs Home Equity Loan vs Reverse Mortgage” for differences that affect subordination decisions.
  • For a broader primer, read “What Is Loan Subordination and When It Applies” to compare scenarios and lender perspectives.

(Links above go to FinHelp articles that explain related topics in greater depth.)

Authoritative sources

Professional disclaimer

This article is educational and reflects general practices as of 2025. It does not provide legal, tax, or financial advice for specific situations. Consult a licensed attorney, tax professional, or mortgage advisor before signing subordination agreements or changing lien positions.