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.

Who benefits from a subordination clause?

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.

Is subordinate financing bad?

Subordination and Second Mortgages If they are giving you a loan (like a second mortgage) that is subordinate to other debts, they consider the loan to be riskier. … The result of this is that you will most likely be charged higher rates on subordinate mortgages than you would be on a primary mortgage.