A subordination agreement is a legal document that defines the rights of multiple lenders who have taken the same property as collateral for a loan. It defines who gets paid first if you default on one or both of your loans, forcing the lenders to foreclose on the property to get repaid.
For example, if you refinance your mortgage and keep a HELOC open, your new mortgage lender will ask your HELOC lender to sign a subordination agreement. If you default on one or both loans, your mortgage lender is paid first, and the remaining proceeds go toward your HELOC.
We’ll share more details about what a subordination agreement on a HELOC is, when you might need one, and how it affects you.
In this guide:
- What is a subordination agreement on a HELOC?
- What does a HELOC subordination agreement look like?
- How to complete a subordination agreement
- What happens after a subordination agreement is completed?
What is a subordination agreement on a HELOC?
A subordination agreement on a HELOC is an agreement between the lenders with rights to your home that specifies which lender gets paid first if you don’t repay as agreed. You’ll often see it if you refinance your first mortgage and keep your HELOC or home equity loan.
The lender who wants to get paid first (i.e., wants a first-priority lien position on your home) will request the subordination agreement. Lenders offering permanent home mortgages almost always want to be in a first-lien position ahead of other home financing, such as HELOCs and home equity loans.
Mortgage balances are often higher than commitments on HELOCs or home equity loans. Since mortgage lenders lend more money in many cases, they want to know they’ll get repaid first if your loan defaults. Subordination agreements specify that they’re in the first position if you don’t pay as agreed.
If your lender says you need a subordination agreement, remember the following six points:
- Your lender will request the subordination agreement. Aside from sharing contact and account information for your HELOC or home equity loan with your lender, you shouldn’t need to do anything to get the subordination agreement.
- A subordination agreement may be necessary even if the same lender has both loans. Subordination agreements specify which loan is repaid first in the event of default. If a lender has your mortgage and HELOC, it will still get a subordination agreement if your loan is sold at some point.
- Lenders offering HELOCs and home equity loans know the process. It’s not unusual for mortgage lenders to request subordination agreements. If your HELOC lender’s risk didn’t change (e.g., it was already in a second-lien position), it should agree to the subordination.
- The time to get it signed depends on the level of risk. If your HELOC lender’s risk didn’t increase, it’s often a quick process. However, if your HELOC is riskier (e.g., you borrowed a lot more money), your lender may need to evaluate the added risk before signing, which will take more time.
- Tell your new lender immediately if you want to keep an open HELOC or home equity loan. Processing your loan might take extra time since your new lender must coordinate with your HELOC lender. Telling your lender about this upfront will help speed up the process.
- Fees for subordination agreements vary by lender. Some lenders charge fees if they need to request a subordination agreement, while others don’t. Ask about fees upfront, so you know how much it’ll cost you.
Let’s say you have an existing mortgage and HELOC. You refinance your mortgage for better terms and keep your HELOC. Your loan amount didn’t change, and your HELOC was already in the second position. Since your HELOC isn’t riskier, the HELOC lender signs and returns the form right away.
In our example, the HELOC lender signed the form because its risk didn’t change. However, if the transaction makes the HELOC riskier, it might not agree to sign. For example, if your loan amount or combined loan-to-value (LTV) ratio surges, the HELOC lender might not agree.
If anything about your new transaction makes your HELOC riskier (e.g., the LTV is higher), the lender may need to reevaluate your loan before it signs the subordination agreement. This will take longer, and there’s no guarantee the lender will approve it. Take this into consideration upfront.
What does a HELOC subordination agreement look like?
Each lender uses a different template to create a subordination agreement for your HELOC, so the form may not always look the same.
You can expect a subordination for a HELOC to include details about the:
- Borrower: To make clear whose loans the subordination agreement applies to, the borrowers’ names are listed on the subordination agreement.
- Property: The subordination agreement is to specify who has the first position lien rights to your property in the event of default, so it will include information about your property, such as its address, legal description, and property tax identification number.
- Subordinating lender: The agreement will provide the name of the lender who is agreeing to subordinate its lien position, the amount of the debt it agrees to subordinate, the name of the borrower on the debt, and details about the lien (e.g., when and where it was recorded).
- New lender: The agreement will include details about the new loan, including the lender’s name, borrower’s name, amount of the loan, and details about the lien, including when and where it was recorded.
- Each lender’s rights: The subordination agreement aims to clarify who gets paid first and has rights to your property in the event of a default, so it will define this.
A subordination agreement is more about the lenders than the borrower, instructing how to proceed if you don’t repay your loan as agreed. It specifies who begins foreclosure proceedings and how the proceeds are shared.
A subordination agreement does not otherwise affect your mortgage or your HELOC. If you repay your loan as agreed, your lenders will never need to use it.
How to complete a subordination agreement
As the borrower, you shouldn’t have to do anything to complete a subordination agreement. In many cases, you may not even need to sign the agreement. Rather, your two lenders will sign the agreement since it defines who gets paid first in the event of default.
You may need to provide your new lender with details about your HELOC, such as your account number and your lender’s contact information. Once you share this with your new lender, it will cover the rest.
However, you may need to get involved if your HELOC lender needs your information to decide whether it is willing to sign the subordination agreement. For example, you may need to answer questions or provide documentation (e.g., updated income information) if the combined LTV increases.
The HELOC lender’s goal in asking questions or requesting additional information is to ensure the subordination agreement doesn’t change the level of risk it takes on your HELOC. If your lender determines its risk didn’t materially change, it will sign the agreement.
What happens after a subordination agreement is completed?
After completing the HELOC subordination agreement, your mortgage transaction will proceed as normal. You can request a copy if your lender doesn’t include one in your closing package.
Nothing about your loans changes with a subordination agreement as far as you’re concerned. It specifies which lender has priority rights to your property and who will get paid first in case of a default.
If you repay your loans as agreed and don’t go into default, your lenders will never use the subordination agreement. If your loan defaults and one or more lenders pursue foreclosure as a remedy, the subordination agreement will help them coordinate collection efforts.