When it comes to obtaining a mortgage, there are many different options available. One option that many homeowners choose is taking out a second mortgage. This type of loan is often used to pay off debts or finance home improvements, and it is secured by the equity in the home. However, if you are considering getting a second mortgage, it is important to understand the subordination policy that second mortgage lenders follow.
What is Subordination?
Subordination is a legal term that refers to the priority of liens on a property. In the case of a mortgage, the lien is the right to foreclose on the property if the borrower fails to make payments. When there are multiple liens on a property, they must be prioritized in case of foreclosure. The lien that has priority is called the senior lien, while the lien that has a lower priority is called the junior lien.
When a borrower takes out a second mortgage, it becomes a junior lien, meaning that it has a lower priority than the first mortgage. This means that if the borrower defaults on their payments, the first mortgage lender has the right to foreclose on the property and be paid first. The second mortgage lender can only be paid from the remaining equity in the property after the first mortgage is satisfied.
Why do Second Mortgage Lenders Follow a Subordination Policy?
The reason that second mortgage lenders follow a subordination policy is to protect their investment. Since the second mortgage is a junior lien, it is riskier for the lender because they have a lower priority in case of foreclosure. To offset this risk, second mortgage lenders often charge higher interest rates and fees than first mortgage lenders.
However, if the borrower defaults on their payments, the second mortgage lender may not be able to recoup their investment if the first mortgage lender forecloses on the property and takes all the equity. By following a subordination policy, second mortgage lenders can ensure that they have a better chance of getting paid if the borrower defaults on their payments.
What is the Subordination Policy of Second Mortgage Lenders?
The subordination policy of second mortgage lenders varies depending on the lender and the specific loan. However, there are some general guidelines that most second mortgage lenders follow:
- The first mortgage must be recorded before the second mortgage.
- The second mortgage lender must agree to subordinate their lien to the first mortgage.
- The second mortgage lender may require proof of insurance and proof of payment on the first mortgage.
- The second mortgage lender may charge a fee for subordinating their lien.
By agreeing to subordinate their lien, the second mortgage lender is acknowledging that the first mortgage has priority in case of foreclosure. This protects the second mortgage lender’s investment by ensuring that they will be paid after the first mortgage lender is satisfied.
When is Subordination Necessary?
Subordination is necessary when a borrower wants to refinance their first mortgage or sell their property and there is a second mortgage on the property. In order to refinance or sell the property, the first mortgage must be paid off. However, if there is a second mortgage, it must be subordinated to the new first mortgage in order for the refinance or sale to go through.
If the second mortgage lender does not agree to subordinate their lien, the refinance or sale may not be possible. This is because the new first mortgage lender will not want to take on the risk of having a junior lien on the property that could take precedence in case of foreclosure.
Conclusion
Understanding the subordination policy of second mortgage lenders is an important part of obtaining a second mortgage. By following a subordination policy, second mortgage lenders are able to protect their investment and ensure that they have a better chance of getting paid if the borrower defaults on their payments. If you are considering getting a second mortgage, it is important to work with a reputable lender who follows a clear and transparent subordination policy.