Question:

What is subordinate financing?

Answer:

Subordinate financing is financing that sits in a junior position behind a first mortgage. Second, third, fourth liens on a property are examples of subordinate financing.

If a borrower defaults, only the first lien is certain to cover (most of) their costs. Subordinate lien holders may never get repaid.

How can a subordinate lien holder get their money back?

This is possible if a lender providing subordinate financing buys the first mortgage, or forecloses. If the borrower defaults on the subordinate mortgage, the junior lien holder can foreclose even though the first mortgage has been paid on time. With a short sale, often a second lien can be bought for 10% of its value as it is not expected that any foreclosure proceeds will be available to satisfy any of it.

Sometimes a first mortgage is changed into second - this is called subordination and is practiced to ensure better financing terms for a property.

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