What is the purpose of a subordination agreement?

A subordination agreement serves a specific function in the context of real estate financing and mortgage priorities. Its primary purpose is to allow later recorded mortgages to take priority over earlier ones. This is crucial in situations where a property owner seeks additional financing or refinancing. By entering into a subordination agreement, lenders can agree to subordinate their existing liens, allowing newer loans to have a higher claim on the property's value in the event of a foreclosure.

This practice is significant because it can facilitate the homeowner's ability to secure additional funding while providing reassurance to the new lender about their position in terms of repayment priority. The implications of subordination agreements extend to risk management for both lenders and borrowers, ultimately influencing decisions around property investment and development.