Subordinate Loan
Definition and meaning of Subordinate Loan in real estate.
Subordinate loan, also known as a junior lien, is a mortgage or home equity loan that has a lower priority than the primary or first mortgage in the event of foreclosure.
In more detail
Lien priority is determined by the order in which loans are recorded in local public records. If a property is foreclosed on, the lender holding the first mortgage is paid off first, and any remaining proceeds are distributed to the subordinate lenders. Because they carry a higher risk of not being paid in full, subordinate loans typically carry higher interest rates than first mortgages. Common examples include second mortgages, home equity lines of credit, and down payment assistance loans.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Junior lien or second mortgage |
| Risk factor | Higher interest rates due to lower priority in foreclosure |
| Common forms | Home equity lines of credit and second mortgages |
To avoid paying private mortgage insurance on a home purchase, the buyer took out a first mortgage for most of the purchase price and a subordinate loan for the remaining down payment.
Frequently asked questions
What happens to a subordinate loan in a foreclosure?
If the foreclosure sale does not generate enough money to pay off the first mortgage, the subordinate loan is typically wiped out, though the borrower may still be personally liable for the debt.
Can you refinance a first mortgage if you have a subordinate loan?
Yes, but the subordinate lender must agree to sign a subordination agreement, which allows them to remain in the second position behind the new first mortgage.