Subordination Agreement at Closing

A subordination agreement at closing is a legal document that is used in real estate transactions to establish the priority of liens on a property. In simple terms, it is an agreement between two or more creditors that establishes which creditor has the first right to collect from a borrower`s assets in the event of default or foreclosure.

The purpose of a subordination agreement is to protect the interests of all parties involved in a real estate transaction, including the buyer, the seller, and any lenders or mortgage companies involved. When a buyer purchases a property, they often need to take out a mortgage or other type of loan to finance the purchase. The lender providing the financing will typically want to have a first lien on the property, which means that they would be the first to collect from the borrower`s assets in the event of default.

However, sometimes there are existing liens on a property that must be paid off before the new lender can have a first lien. For example, if the seller of the property has a mortgage on the property, that mortgage must be paid off before the new lender can have a first lien. This is where a subordination agreement comes in.

The subordination agreement establishes a hierarchy of liens on the property, with the new lender having a lower priority than any existing liens. This means that if the borrower defaults on their loan, the existing liens would be paid off first, with any remaining funds going towards the new lender`s loan.

A subordination agreement is typically signed at closing, when all parties involved in the transaction are present. It is important to have a skilled real estate attorney review and draft the agreement to ensure that it is legally binding and enforceable. Lenders and mortgage companies will also want to review the agreement to ensure that their interests are protected.

In conclusion, a subordination agreement at closing is a crucial document in real estate transactions, as it establishes the priority of liens on a property and protects the interests of all parties involved. If you are involved in a real estate transaction that requires a subordination agreement, it is important to consult with a skilled real estate attorney who can help you draft and review the agreement.