A subordination agreement is a legal document that establishes the priority of lien rights on a property. It outlines the order in which creditors will be paid in the event of a sale, foreclosure, or bankruptcy. A subordination agreement is essential for any borrower who wants to obtain additional financing while still keeping their property.
Below are some considerations to keep in mind while drafting a subordination agreement.
1. The existing lien must be identified — The subordination agreement must identify the existing lien that the borrower is trying to subordinate. It could be a mortgage, a deed of trust, or any other secured loan.
2. The terms of the subordination — The document should clearly state the terms of the subordination, including the order in which the creditors will be paid from the proceeds of the sale or foreclosure. The subordination agreement should also clearly list any conditions that must be met before it comes into effect.
3. Review of the loan documents — The parties involved in the subordination agreement should review the loan documents to ensure that they are in compliance with state and federal regulations.
4. Notarized signatures — All parties must sign the subordination agreement and have their signatures notarized. This helps to ensure that the document is legally binding.
5. Consultation with legal counsel — It is recommended that parties involved in the subordination agreement seek the advice of legal counsel before signing the agreement. This can help to avoid any legal disputes that may arise in the future.
6. Recording the agreement — It is important that the subordination agreement be recorded with the county recorder`s office in the county where the property is located. This ensures that the agreement is public and enforceable by future creditors.
In conclusion, subordination agreements play a crucial role in the financing process. They help borrowers obtain additional financing while maintaining ownership of their property. It is important to consider the factors above while drafting a subordination agreement to ensure it is legally binding and enforceable.