How to Subordinate a Second Mortgage

Second mortgage subordination is commonly done when a first mortgage is refinanced and the homeowner wishes to keep his second mortgage in place and not pay it off with the proceeds of the first mortgage. In order for a second mortgage to be subordinated, a series of steps must be completed, and all parties in the transaction must be in agreement. Read further for more information.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

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1. Know your equity situation. It is crucial that you know what your home is worth and the balances of your first and second mortgages. The difference between your home's value and the balances of your home loans is your available equity.

2. Make sure the transaction makes sense. Because lenders have lending limits and your goal is to leave your second mortgage alone, your combined loan-to-value (CLTV) ratio may not exceed the lender's requirements. This means that even though your second mortgage will remain in place when the first is refinanced, there must be enough room within the value of your home to accommodate your new first and your existing second. For example, if your home is worth $100,000, and you refinance your first mortgage at $75,000 and your existing second is at $20,000, your current combined loan to value ratio would be 85 percent of the value of your real estate.

3. Obtain an subordination agreement. In the example in Step 2, to make the subordination possible, the CLTV must be acceptable to the first and second mortgage lender. This means you must determine if your new first mortgage lender and the lender on your existing second will allow the second mortgage to be subordinated. If your first and second mortgages are with the lender this may be a non issue. However, it is common for lenders to deny this type of transaction as part of their lending policies. If this is permissible by your lenders, a subordination agreement will be issued by the lender on your existing second. This agreement simply indicates that the second mortgage will remain in place under its existing terms and will not be replace by a new loan upon refinance.

Tips & Warnings

• Only work with experienced loan officers when attempting to subordinate your second mortgage.
• Do not allow multiple lenders to obtain copies of your credit report if you are shopping for interest rates or banks. Multiple credit report inquiries in a short period of time could reduce your credit score, causing lenders to deny you financing.

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on 3/11/2009 Be careful; there are multiple errors in this article, both in terms of math (e.g. $95k in debt / $100k value = 95% loan-to-value ratio, not 85%) and facts (e.g. multiple credit inquiries within a short enough period are counted as a single inquiry for credit scoring purposes, exactly to encourage savvy consumers to be able to shop around).