What are the subordination requirements for a loan?
Subordination requirements vary by loan type and lender. For example, the subordination requirements for a mortgage are different than the requirements for a home equity loan or home equity line of credit (HELOC).
The best way to determine the subordination requirements for a given loan, including a mortgage, is to review your loan documents and contact your lender or loan servicer. The servicer is the company to which you make your loan payment. After reviewing your loan documents and contacting your lender or servicer you can understand if it is possible to subordinate the loan and how the process works.
The willingness of a lender to grant a subordination request depends on the lender’s internal policies and the priority of the loan relative to other loans. All mortgages require lender approval to subordinate the loan and lenders are unlikely to agree to subordinate unless extraordinary circumstances are involved. For example, if you want to subordinate your mortgage to obtain a PACE loan that holds first lien priority, your lender is highly unlikely to approve the request.
Lenders almost always decline subordination requests because subordinating a mortgage means another loan or debt is repaid in full before the mortgage is repaid. Subordinating a mortgage exposes the lender to more risk in the event you default on the loan. Lenders are usually unwilling to subordinate a mortgage unless the lender also holds the loan that would be senior to the mortgage or the lender receives a financial inducement such as a fee.
If you make a subordination request for a home equity loan or HELOC, the lender is more likely to approve it because those loans are usually already second in priority to the mortgage on the property. For example, if you want to refinance your mortgage and have a home equity loan that you prefer to keep in place, the home equity loan lender technically needs to subordinate its loan for the refinance to be finalized.
As long as the new mortgage terms such as the interest rate and monthly payment are reasonable and the total amount of loans against the property (combined loan-to-value (CLTV) ratio) does not increase significantly, the home equity loan lender should agree to the subordination request. If the new mortgage payment or CLTV changes significantly, the home equity loan lender may not subordinate its loan and you cannot refinance the mortgage because a first mortgage lender would not agree to a second lien position.
If a lender agrees to subordinate its loan, you are usually required to complete paperwork to document the change. Some lenders may charge a fee to process your request.
Depending on the type of loan, the lender and the specifics of your subordination request, you may be required to modify the loan, which requires written consent from both the borrower and the lender. In these cases, the lender may file the revised loan documents with your local recorders office to document the transaction and ensure that all property liens are up-to-date.
Please note that loan subordination requirements are specific to each lender and loan. If you want to subordinate a loan, your first step is to contact your lender and determine what is feasible.
Sources
"B2-1.2-04, Subordinate Financing." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 8 2019. Web.
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