What does subordinate a loan mean
Best Answer: Your 80/20 mortgage is actually 2 mortgages. One mortgage for 80% of the purchase price and the 2nd mortgage is for the remaining 20%. These mortgages are recorded in the order they were executed. The 80 is the first one recorded and the 20 is the second one recorded.
Now, when you refinance the first mortgage, you are actually paying off the first mortgage loan and getting a new mortgage complete with all those dreaded documents that took you forever to sign when you first got your loan. This would make the new recording order as follows: the 2nd mortgage is first in line and then the new mortgage, lets call it ( new mortgage x ), is second in line.
What it means to subordinate is that you need to get the 2nd mortgage holder, the 20% lender to agree to be placed after the newest mortgage you are executing.
All of this only becomes important if you default and they need
to foreclose on the home. Whoever is in line first gets paid first when they eventually sell the home trying to get back what you owe. Since the 80% lender stands to lose more if default should occur, they are asking to be placed at the head of the line and the other lender to be subordinate and take the back seat so to speak. Since most foreclosures do not sell for what is actually owed the second recorded lender stands to lose their entire investment or at minimum a portion of what you were loaned. Thats why the "new" mortgage holder is wanting to be placed in the first position. They have more to lose and want to make sure they get back as much as possible if foreclosure should take place.
Most 2nd lenders dont have a problem with subordinating back to the second slot as they were 2nd in line to start with.
Source(s): Licensed Real Estate Broker
t5377537 · 5 years agoSource: answers.yahoo.com