The second instance in which you might have a problem getting a rehab agreement if you refinance a mortgage is if you have little or no equity in your home. In this case, the lender fears that you will not be able to repay the loan. A subordination agreement is a legal document that classifies one debt as less than another, which is a priority in recovering repayment from a debtor. Debt priority can become extremely important when a debtor becomes insolvent or declares bankruptcy. If you have a first mortgage plus a home loan or HELOC and want to refinance it, then you have to go through the relocation process. Resubordination is often reduced to “subordination.” If you refinance, you pay your first mortgage and put a new first mortgage in their place. As the initial mortgage is no longer there, the home loan or HELOC moves to the primary or principal debt position, unless there is a re-education agreement. Unsurprisingly, mortgage lenders do not appreciate the risk associated with a second pledge. A bidding agreement allows them to reallocate your mortgage on the first pledge and your HELOC to the second deposit position.
Despite its technical name, the subordination agreement has a simple purpose. It assigns your new mortgage to the first deposit position, which allows a refinancing with a home loan or a line of credit. Signing your contract is a positive step in your refinancing trip. Without a re-education agreement, the second mortgage would be the first position for refinancing the first mortgage – which the lender does not want. Some people remove the “re” and simply call it subordination. This subordination of the loan is often described in an agreement or a subordination clause. The purpose of a bid agreement in a mortgage is to protect the primary lender on the home, usually the financial institution that holds the first mortgage. It is this institution that will lose the most in the event of a seizure. The subordination clause simply guarantees that the first mortgage holder will be paid first when the house is foreclosed. Subordination agreements can be used in a variety of circumstances, including complex corporate debt structures. The financial institution holding the home loan or HELOC must accept that its loan is the second most in the first mortgage as part of a rehabilitation agreement.