Quick overview

A subordination agreement lets one lender voluntarily accept a lower priority position than another lender for claims against the same property or asset. Priority determines who gets paid first if the borrower defaults or the collateral is sold—so the order matters to lenders and to borrowers planning refinancing or additional borrowing.

How subordination agreements work

  • Lien priority is usually based on the order liens are recorded: first recorded = first priority. A subordination agreement changes that recorded priority by contract.
  • Typical use: a homeowner with a first mortgage and a HELOC wants to refinance the first mortgage. The HELOC lender may sign a subordination agreement so the refinanced mortgage keeps first position. Without it, the HELOC could block refinancing or force a payoff.
  • A subordination agreement does not change the borrower’s debt obligations — only the order creditors are paid in a default.

(For a practical look at how loan priority affects refinancing choices, see our guide: How Loan Subordination Affects Home Equity and Refinances.)

Common situations when it applies

  • Rate-and-term or cash‑out refinances where a junior lien (second mortgage or HELOC) already exists.
  • Adding new financing (e.g., business loans secured by the same property) where an existing lender must agree to be subordinated.
  • Loan restructures or modifications that change collateral or payment order.

Real-world example

A homeowner has a $200,000 first mortgage and a $40,000 HELOC (recorded second). The owner wants to refinance the first mortgage to a lower rate. The HELOC lender signs a subordination agreement so the new mortgage keeps first priority. If the HELOC refused, the new lender might require the HELOC be paid off before refinancing.

In my practice I’ve seen lenders routinely require subordination when a borrower seeks a cash‑out refinance; refusing to subordinate is a common reason refinances are denied.

Who is affected

  • Borrowers with more than one lien on the same property (first and second mortgages, HELOCs, or other secured loans).
  • Lenders that rely on lien priority to limit risk.
  • Real estate buyers or sellers when title and payoff ordering must be clear at closing.

Practical tips

  • Ask lenders early: request a subordination agreement well before closing to avoid delays. Lenders often need time for underwriting and legal review.
  • Get the document reviewed: have a real estate attorney or experienced loan officer confirm the language protects your refinance plans and doesn’t unintentionally expand the subordinated creditor’s rights.
  • Consider alternatives: sometimes paying off the junior lien or using a partial payoff/restructure is faster than securing a subordination.

Also see guidance on choosing between equity options if you’re deciding how to borrow against your home: When to Use a HELOC vs Cash‑Out Refinance for Renovations.

Common mistakes and limits

  • Assuming subordination is automatic: lenders can refuse. They evaluate credit risk, seasoning (how long the junior lien has existed), and their own underwriting rules.
  • Expecting subordination to trump statutory liens: property tax liens and some government liens often have priority regardless of subordination agreements.
  • Overlooking costs: some lenders charge fees or require a payoff as a condition of subordinating.

When subordination may not help

Subordination manipulates contractual priority among consenting creditors but cannot erase liens or change legal priorities set by statute (e.g., tax liens). If title issues or junior lender refusals exist, payoffs, releases, or negotiated settlements may be necessary.

Short FAQs

  • Can I negotiate a subordination agreement? Yes—terms and conditions can be negotiated, but acceptance is up to the lender.
  • Will subordination affect my credit? No—subordination changes lien order, not whether debt exists or your payment history.

Professional disclaimer

This article is educational and not legal or financial advice. Consult a qualified attorney or loan officer about specific transactions and local lien law.

Sources and further reading

(Information current as of 2025.)