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Example of a Subordination Agreement The business files for bankruptcy and its assets are liquidated at market value$900,000. The senior debtholders will be paid in full, and the remaining $230,000 will be distributed among the subordinated debtholders, typically for 50 cents on the dollar.
If the subordination request is approved, the agreement will be executed by the home equity lender and recorded in the applicable land records. The subordination agreement serves to make the home equity line of credit subordinate to the newly obtained mortgage even though the new mortgage was recorded after it.
A mortgage subordination refers to the order the outstanding liens on your property get repaid if you stop making your mortgage payments. For example, your first home loan (primary mortgage) is repaid first, with any remaining funds paying off additional liens, including second mortgages, HELOCs and home equity loans.
A subordination clause is a lease provision whereby the tenant subordinates its possessory interest in the leased premises to a third-party lender, usually a bank (the rights of the tenant are thus subject to the rights of the lender).
In executory subordination agreement, a subordinating party agrees to subordinate his/her interest to the security interest of another succeeding instrument. Such an agreement may become difficult to impose later on since it is only a promise of agreeing in the future.
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The creditor usually will require the debtor to sign a subordination agreement which ensures they get paid before other creditors, ensuring they are not taking on high risks.
Who Benefits from a Subordination Clause? A subordination clause is meant to protect the interests of the primary lender. A primary mortgage usually covers the cost of purchasing the home; however, if there is a secondary mortgage, the clause ensures that the primary lender retains the number one priority.
In case the borrower places other liens against the asset, such as a second mortgage, the lender would require a subordination agreement to protect its interests.
Subordination agreements are prepared by your lender. The process occurs internally if you only have one lender. When your mortgage and home equity line or loan have different lenders, both financial institutions work together to draft the necessary paperwork.
A subordination agreement prioritizes collateralized debts, ranking one behind another for purposes of collecting repayment from a debtor in the event of foreclosure or bankruptcy. A second-in-line creditor collects only when and if the priority creditor has been fully paid.

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