Subordination: What is it & why should I care?

Guest-blogging today is Alex Nunemaker, a Loan Consultant with Borrow123.com. He can be reached at alex@borrow123.com with any specific questions or comments.

You have a mortgage that you’d like to refinance – but you also have a home equity line or other 2nd trust on the property. While this situation is fairly common, the market has made getting these 2nd trusts “subordinated” more difficult.

To begin with resubordination (or just subordination) is required when you have more than one lien on the property. More than likely, your smaller 2nd trust (such as the case if you have an old 80-10-10 loan) or a Home Equity line is in the second lien position. Anytime you refinance your primary or first mortgage you have to get a Subordination Agreement from you 2nd trust holder. This agreement will state that your 2nd trust holder has reviewed the new terms and conditions and they agree to stay in the 2nd lien position. Otherwise the new mortgage you are refinancing into would go into the 2nd position, and your Home Equity Line would bump into the first lien position (which almost all lenders will not agree to).

While it’s not important that you as a borrower now everything that goes on this process, there are a few reasons why you as a borrower may be effected, and they all stem from two facts: 1) home values are dropping and 2) interest rates are low and 2nd trust lender have received a lot of requests for subordinations. As a result lenders are taking longer to subordinate loans and are rejecting more subordination requests.

Let’s look at an example:

You have a first mortgage of $250,000; a HELOC with no balance but a total line up to $100,000. Your current market value is $350,000, but when you received the HELOC it was $450,000. When you send in a subordination request they will calculate your CLTV based upon your first mortgage + the total line (not just your balance – since you can draw upon the entire line). This would make your CLTV 100% since your value is $350,000. Most lenders will not approve this – traditionally what we see is lenders approving loans between 85-90% CLTV as a maximum. To proceed with the loan you would likely need to reduce your total HELOC amount or reduce your 1st mortgage loan amount.

Before even locking in a rate, it is also imperative to contact your 2nd trust lender to see how long their turn-times are for subordinations. While in the past in only took a couple of days, we now routinely see them take 2-8 weeks which will effect your lock-in period.

Many times, it makes more sense (especially if you have a HELOC with no balance) to close the loan and reopen another HELOC after refinancing. Just make sure you won’t have any unexpected early closure penalties. With any loan these days it’s important to contact your 2nd trust lender to see how long they would take, and if they have any special guidelines to make your refinance as smooth as possible.