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With the combination of historically low mortgage rates and the fact that real estate values have dropped, many people find themselves in a situation where then want – or need, based on current first mortgage guidelines – to refinance only their first mortgage while they leave their second mortgage (or line of credit) alone.

The challenge here is that mortgages work in a first-in, first-out fashion.  Meaning that they are paid in the order in which they were recorded. This presents a hurdle for those that want to only refinance their first mortgage. The solution is a Subordination Agreement from their second mortgage-lender.

The subordination of mortgage loan results in a second mortgage retaining its junior position while the first mortgage is being refinanced separately from any other debt obligations. If it were not for the mortgage subordination agreement, the second mortgage (or home equity loan or line of credit) would automatically take first lien position.

If you qualify for home loan subordination, you enjoy the benefit of keeping your home equity loan available to you or your second mortgage in place while refinancing the first mortgage.

Some first mortgage lenders will simply pay off the second lien loan with the refinance transaction, to make sure their mortgage is recorded in first lien position. This, however, is not always possible in today’s tough lending market.

General Requirements from Junior Lien Lender to Approve Mortgage Loan Subordination

  1. Suggested home loan subordinate has to be current with up-to-date payments.
  2. The refinanced first mortgage monthly payment increase is likely to be subject to certain limits.
  3. Cash-out and debt consolidation is generally not allowed.
  4. Should the junior lien lender agrees to remain in subordinate position, they are likely to request that all fees are paid by the lender/borrower initiating the subordination request.
  5. If the amount of the refinanced first mortgage is going to increase, subordination review might take longer until all details are explained to the junior lender’s satisfaction.
  6. Many lender’s have very strict guidelines for these subordinations; these are only the basic requirements that we see across the board.

Please contact me so that I can help you determine if this is a viable option for your home loan refinance.

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