What Is Subordinate Financing And Why Is It Important?

Abstract

What Is A Subordinate Financing? When you take the first mortgage to purchase a property that acts as a senior lien, any other loan taken on the same property is known as subordinate financing or junior lien. Why Is Subordinate Financing Important? It is in the interest of the lenders in case of multiple liens if the borrower is unable to pay for his or her obligation on the liens. If the property is sold to pay off the creditors, the proceeds are used to payoffs these liens based on the lien position. After paying the senior lien, there are not enough proceeds left to pay the junior lien, the lender has to choose another option to collect the money from the borrower. In such a situation, your subordinate lien will become a senior lien. In another situation, if you have a first mortgage which is by default a senior lien on the property and IRS puts a claim on the property as a lien for unpaid income taxes, or your county puts a lien on your property for unpaid property taxes. These types of liens are by default positioned as senior liens and pushes down your mortgage to a subordinate lien position.