Overview

Subordination lets a current lienholder agree in writing to lower its priority so a new lender can move ahead in the payment order. In practical terms, this can unlock home equity for a cash-out loan, HELOC, or business financing without forcing the borrower to refinance every existing loan.

How subordination works — step by step

  1. You apply for new financing (HELOC, mortgage, or business loan) that needs priority on the title.
  2. The new lender or title company asks existing lienholders to sign a subordination agreement.
  3. The subordinating lender reviews the request — this often includes a title search, updated payoff amounts, a current appraisal, and income verification.
  4. If approved, the lender signs a subordination agreement that becomes part of the loan file (and may be recorded).
  5. The new loan is funded with the agreed priority; the subordinated lien remains on the property but behind the new lien.

Why lenders sometimes agree

Lenders may accept subordination when the request does not materially increase their long-term risk. Typical considerations include current loan-to-value (LTV), the borrower’s credit and income, the new loan size, and an updated appraisal. Some lenders charge a review or processing fee, and others decline if their exposure would increase materially.

Common scenarios

  • Refinance that needs to preserve an existing HELOC: A second-lien lender can sign a subordination agreement so the refinanced first mortgage stays in first position. See our guide on how subordination affects second mortgages and HELOCs for details: How Loan Subordination Affects Second Mortgages and HELOCs.
  • New cash-out or business loan that must be first: An older second mortgage or HELOC can be subordinated so the new lender takes higher priority. Compare borrowing options before you request subordination — for many borrowers a HELOC or cash-out refinance fits differently depending on goals: HELOC vs Cash-Out Refinance: Pros, Cons, and Costs.

Eligibility and documentation checklist

  • Current mortgage statements and payoff letters for all liens.
  • Recent appraisal or automated valuation (AVM) requested by the new lender.
  • Title search and evidence of the lien priority.
  • Proof of income and assets the new lender requests.
  • Signed subordination agreement (and any fee paid to the subordinating lender).

Practical tips from my practice

  • Get an early title search: That reveals lien order and surprises before you apply.
  • Request a written subordination policy from the subordinating lender — some lenders have standardized approval criteria and fees.
  • Compare options: sometimes a partial or full refinance (cash-out) is simpler than securing subordination. Review the tradeoffs in cost and rates with a lender or mortgage broker.
  • Avoid over-leveraging: run stress tests on payments if rates rise (especially if using a variable-rate HELOC).

Common mistakes and misconceptions

  • Assuming subordination is automatic: lenders must agree in writing. Never assume an existing lien will subordinate without a signed agreement.
  • Confusing subordination with release: subordination keeps the lien in place but moves its priority — it does not remove the debt.
  • Ignoring tax rules: interest deductibility for home equity debt depends on how you use the funds; check the IRS guidance before assuming interest is deductible (see IRS.gov).

Risks to consider

  • Priority in foreclosure: subordinating a lien keeps that loan at risk of being paid later in a foreclosure.
  • Declined requests: a lender may refuse, forcing a borrower to refinance or pay off the subordinated loan.
  • Fees and delays: processing can add cost and extend closing by several weeks.

Timing and costs

The process varies by lender and title company. Expect anywhere from 2–6 weeks for review and execution, sometimes longer if additional valuation or underwriting is required. Fees vary: some lenders waive a fee; others charge several hundred dollars to review and sign a subordination agreement.

Frequently asked questions

Q: What are the main risks when you subordinate a loan?
A: The main risk is reduced priority: if the property is foreclosed, the subordinated lender is paid after higher-priority liens. That can increase the subordinated lender’s loss exposure and is why some lenders refuse to subordinate.

Q: How do I ask my lender to subordinate?
A: Ask the new lender or title company to contact the existing lienholder with a formal request. Provide payoff figures, the new loan terms, a current appraisal, and any forms the subordinating lender requires.

Where to learn more

  • Consumer Financial Protection Bureau (CFPB) explains home loans, HELOCs, and lender responsibilities: https://www.consumerfinance.gov (CFPB).
  • For tax treatment of mortgage and home-equity interest, consult IRS guidance at https://www.irs.gov (IRS).

Final note and disclaimer

In my practice, subordination is a useful tool when homeowners need targeted financing without restructuring every mortgage. However, it’s a legal and underwriting decision for lenders — results vary. This article is educational only and not personalized financial or legal advice. Consult a mortgage professional, closing attorney, or tax advisor before you sign documents.