A subordination agreement is a legal document that outlines the priority of debt payments in the event of a foreclosure or bankruptcy. In the case of reverse mortgages, a subordination agreement is often required to ensure that the lender has priority over other creditors in the event of default.
A reverse mortgage is a loan that allows homeowners who are 62 years old or older to borrow against the equity in their homes. Unlike traditional mortgages, a reverse mortgage does not require monthly mortgage payments. Instead, the loan is repaid when the borrower sells the home, moves out permanently, or passes away.
When a borrower takes out a reverse mortgage, the lender places a lien on the property, which gives the lender the right to the proceeds from the sale of the home. However, the lien is subordinate to any existing liens or mortgages on the property. This means that if the borrower has an existing mortgage or other debts secured by the property, those debts must be paid off before the reverse mortgage lender can be paid.
To protect their interests, reverse mortgage lenders often require borrowers to sign a subordination agreement. This agreement states that the reverse mortgage lender`s lien will have priority over any other liens or mortgages on the property.
In practical terms, a subordination agreement means that if the borrower defaults on their mortgage or becomes bankrupt, the reverse mortgage lender will be first in line to receive any proceeds from the sale of the home. The lender with the second lien or mortgage on the property will then be paid, followed by any subsequent liens or mortgages.
The subordination agreement also ensures that the reverse mortgage lender will be able to sell the property for a fair price in the event of default. Without a subordination agreement, the lender would have to pay off any existing mortgages or liens on the property before selling it, which could make it harder to find a buyer and could reduce the amount of money the lender would receive.
In conclusion, a subordination agreement is an important legal document for reverse mortgage lenders and borrowers. It ensures that the lender`s lien will have priority over any other liens or mortgages on the property, which protects the lender`s interests and helps to ensure a fair sale price in the event of default. If you are considering a reverse mortgage, make sure you understand the terms of any subordination agreement before signing it.