Subordination Agreements Explained: Priority Between Debts

Overview
A subordination agreement (sometimes called a subordination clause or deed of subordination) lets one creditor agree to be paid after another. Lien priority normally follows the order liens are recorded, but a written subordination agreement legally rearranges that order so a lender‑specified loan remains senior. This matters because senior creditors get first access to collateral value in foreclosure or bankruptcy, reducing loss exposure for the senior lender and increasing risk for the subordinated lender (Consumer Financial Protection Bureau: https://www.consumerfinance.gov).

How subordination agreements work — step by step

• Parties: borrower, senior lender (the creditor who wants priority), and junior/new lender (the one being subordinated).
• Trigger: borrower requests new financing (e.g., a HELOC or refinance) or lender wants to reorganize loan priority for a project.
• Agreement: the senior lender signs a written subordination agreement stating the junior lien is subordinate to the senior lien.
• Recording: the agreement is usually recorded in the county land records so title searches reflect the new priority.
• Outcome: in foreclosure or bankruptcy, proceeds go to satisfy the senior lender before subordinated claims.

Common uses and real‑world examples

• Mortgages and HELOCs: A homeowner seeking a home equity line often must ask the first mortgage servicer to subordinate the HELOC so the first mortgage stays primary. If the servicer declines, the HELOC lender may refuse financing or charge a higher rate.
• Refinances: When a borrower refinances a first mortgage but wants to keep a second mortgage or HELOC in place, the refinancing lender may require a subordination agreement so the refinanced loan remains first lien.
• Construction and project financing: Multiple lenders on a single property frequently use subordination to define pay order among mezzanine, construction, and permanent lenders.
  Example: If a property has a $200,000 first mortgage and a $50,000 second mortgage, the second lender signs a subordination agreement so a new $250,000 loan can take first position; if the property sells in foreclosure, the first lender gets repaid first.

Why lenders care
Senior lenders protect their collateral priority to limit losses. Subordination agreements let borrowers access additional capital without disturbing the senior lender’s protections. Junior lenders accept more risk and typically charge higher interest or require additional security.

Effects in bankruptcy and foreclosure
A valid subordination agreement governs payoff order regardless of later bankruptcy filings: subordinated debts are paid after senior debts to the extent of available collateral (bankruptcy law and state lien statutes may affect unsecured claims — consult counsel). A subordination agreement does not eliminate a subordinated creditor’s right to pursue deficiency claims or unsecured remedies outside the collateral.

How to obtain and negotiate a subordination agreement

1. Ask the senior lender early—many lenders have standard subordination forms and process requirements.
2. Expect conditions—lenders may require proof of borrower credit, appraisal, or a fee to approve subordination.
3. Consider timing—recording the subordination agreement and coordinating closing steps prevents priority disputes.
4. Get it in writing and record it—oral agreements don’t alter recorded priority.

Red flags and common mistakes

• Failing to record the agreement: priority disputes arise if the subordination isn’t placed in public records.
• Assuming the senior lender will always agree: servicers can deny subordination or set restrictive conditions.
• Ignoring state law: lien priority rules and the enforceability of subordination clauses vary by jurisdiction.

Practical tips from practice

• If you’re a borrower looking for a HELOC, ask whether the first mortgage servicer routinely subordinates HELOCs and what documents they require.
• Junior lenders: price for added risk and consider taking additional covenants or personal guarantees.
• When refinancing, confirm existing junior liens’ positions and obtain written subordination before closing to avoid delays.

Related FinHelp resources

• Read about alternatives to primary‑mortgage strategies in our article on “Mortgage PMI Alternatives: Piggyback Loans and Lender Credits” (https://finhelp.io/glossary/mortgage-pmi-alternatives-piggyback-loans-and-lender-credits/).
• If you manage several properties, see “Managing Multiple Mortgages: Strategies for Investors with Several Properties” for approaches that interact with lien priority (https://finhelp.io/glossary/managing-multiple-mortgages-strategies-for-investors-with-several-properties/).
• For issues around foreclosure timing and cure options, review “Understanding Reinstatement Rights After a Mortgage Default” (https://finhelp.io/glossary/understanding-reinstatement-rights-after-a-mortgage-default/).

Frequently asked questions
Q: Can a subordination agreement be undone?
A: Only by a written agreement of the parties or by operation of law (e.g., full payoff of the senior loan). Lenders typically require written release or substitution.

Q: Will a subordination agreement protect a subordinated lender in bankruptcy?
A: It preserves lien priority but does not guarantee recovery—bankruptcy priorities, churn of collateral value, and unsecured claims can still limit recovery.

Authoritative sources and further reading

• Consumer Financial Protection Bureau — consumerfinance.gov (guides on mortgages and HELOCs).
• U.S. Department of Housing and Urban Development (HUD) — hud.gov (mortgage practice guidance).

Professional disclaimer
This article is educational and does not constitute legal or financial advice. For transaction‑specific guidance, consult a licensed attorney or your lender.

(Last reviewed: 2025)