What is a Subordinate Mortgage?
By Ann WhiteDiscover when a subordinate mortgage is unenforceable. First liens have legal priority and remain enforceable against all subsequent lien holders.
A subordinate mortgage creates a junior lien on real estate. The holder of a junior lien must honor all rights, titles and interests obtained by former lenders so long as prior debts remain unpaid and former liens remain valid.
Understanding Liens
A person who purchases clear title to real estate, for cash, obtains complete ownership. A person who borrowers money to purchase real estate and gives a lender a lien does not obtain unencumbered title. A lien is a valid interest in real estate that is enforceable in the event of nonpayment of a loan.
Today, homeowners frequently seek additional loans to gain access to home equity. Absent refinancing with an original lender, a second lender cannot enforce a second lien without first paying all preexisting secured loans. In this situation, the home equity loan becomes a subordinate mortgage because it has less priority. Foreclosure on a subordinate mortgage is difficult when real estate values drop significantly but is not impossible.
Enforcing a Subordinate Mortgage
The holder of a subordinate mortgage must honor the rights of preexisting lien holders. In the event of nonpayment of second loan, the holder of a junior lien cannot foreclose on property until satisfying all superior loans and lien holders. Satisfaction of prior liens requires full payment of all outstanding balances owed on supported debts. In practice, junior lenders arrange payment of debts before foreclosing and demand a release of all liens.
When the market value of a home falls below the amount owed on a note secured by a first lien, second lien holders seldom foreclose. In this example, the foreclosure process would require the owner of a subordinate mortgage to pay more that the collateral is worth.
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- How Do I Subordinate My Second Mortgage?
- What Is Title Insurance For A Mortgage Loan And Why Is It Required?
- Is A Mortgage A Lien?
- What Is Mortgage Funding?
- What Is A Mortgage Combo Loan?