What Is a Subordination Clause in Real Estate?

A subordination clause is a provision in a mortgage or loan agreement that establishes the priority of liens on a property. It determines which lender gets paid first if the borrower defaults or the property is foreclosed.

Subordination Clause: Simple Definition

A subordination clause gives one lender the right to stay in first lien position while requiring another lender to accept a lower priority. This clause is commonly used when refinancing or when a borrower takes out additional financing such as a HELOC or a subordinate mortgage.

Liens with higher priority are paid before lower-priority liens during a foreclosure sale.

How a Subordination Clause Works

When a property has more than one loan, lenders use subordination to determine the order in which debts are repaid. The lender in the first position has the strongest claim to sale proceeds if the borrower defaults.

Common situations where subordination clauses appear:

  • Refinancing a first mortgage when a second mortgage already exists
  • HELOCs or home equity loans added after the first mortgage
  • Construction loans needing first-lien priority
  • Commercial real estate financing with layered debt

Without the clause, refinancing could accidentally move a second mortgage into first position — something first lenders will not allow.

Why Subordination Matters

Subordination clauses protect lenders and ensure financing remains possible when new loans are added. They directly impact:

  • Foreclosure priority — who gets paid first
  • Interest rates — higher risk loans cost more
  • Refinance eligibility — second lenders must agree to subordinate
  • Equity access — determines whether borrowers can take out additional loans

Without subordination, refinancing or stacking loans would often be impossible.

Examples of Subordination Clauses

  • A homeowner with a HELOC refinances their first mortgage. The HELOC lender signs a subordination agreement, keeping the new refinance in first position.
  • A construction lender requires first-lien priority before releasing funds. A prior lender agrees to subordinate.
  • A seller-financed second mortgage automatically takes a lower lien position due to a subordination clause in the primary loan.

In each case, lenders establish a clear repayment hierarchy.

Subordination Clause vs. Subordinate Mortgage

The terms are related but not identical:

  • Subordination Clause: A contract provision that sets lien priority.
  • Subordinate Mortgage: A loan that sits behind the primary mortgage in repayment order.

A subordinate mortgage is the result of lien priority; a subordination clause is the mechanism that creates it.

Risks and Considerations

  • The second lender may refuse to subordinate, blocking a refinance.
  • Lower-priority loans face higher foreclosure risk.
  • Lenders may charge fees for subordination agreements.
  • Borrowers may lose refinancing opportunities without subordinate lender approval.

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