Mortgage Loan Originator (MLO) Licensing Practice Test 2025 – Your All-in-One Guide to Exam Success!

A subordination agreement is a legal document that allows a lender to have a lower priority mortgage lien, which can be crucial when dealing with multiple loans secured by the same property. The primary purpose of this agreement is to ensure the lender's priority of lien, meaning that in the event of a default or foreclosure, the lender specified in the subordination agreement will have the first claim on the proceeds from the sale of the property over other creditors or lenders who may have claims against the same property.

This is particularly important in scenarios where a borrower wishes to refinance an existing loan or take out a second mortgage. By subordinating the existing loan to a new loan, it ensures that the new lender has a first lien position, which makes it more secure and may impact the terms under which the new loan is offered. This can help borrowers access better financing options and assist them in managing their finances more effectively.

Other aspects like eliminating previous debts, providing insurance to the borrower, or extending the loan repayment period are not the function of a subordination agreement, which is specifically focused on clarifying the priority of claims among lenders.