Bank Loan Subordination Agreement

September 12, 2021 at 6:23 am

A debt subordination agreement can be concluded in two ways. As with the equity line, your home lender can grant loans from a junior position. This means that the lender grants your business a loan that, from the beginning, is in the second position – in other words, subordinated – to another loan. Alternatively, you might have an existing loan, but you need new financing. Instead of repaying existing financing, the new lender requires the original lender to subordinate its shares to the new loan. The original lender would enter into a subordination agreement with the new lender. With the debt subordination agreement, the new lender now occupies the first position and the original lender takes the second position. Let`s look at the basics of subordination, using a home line of credit (HELOC) as the main example. Remember that these concepts are still valid if you have a home loan. Despite its technical name, the subordination agreement has a simple purpose. It assigns your new mortgage to the first deposit position, so it is possible to refinance with a home loan or line of credit.

The signing of your agreement is a positive step forward on your refinancing path. If there is not enough equity to cover what is due to your second right of pledge, the lender HELOC loses money. Subordination can`t magically repay loans, but it helps lenders assess risk and set appropriate interest rates. In case of enforcement, your mortgage and HELOC must be repaid with your home`s own funds. Unfortunately, a home`s equity can`t always cover the full cost of both loans. Subordination solves this problem with predetermined set positions. If you have any questions about subordination, we are here to help. See you with us today. Most subordination agreements are flawless. In fact, you may not realize what`s going on until you`re asked for a signature. Other periods, delays or fees may surprise you.

Here are some important indications about the process of subordination. Subordinated debt is riskier than priority loans, so lenders typically charge higher interest rates to offset the risk. A debt subordination agreement is entered into if one of your company`s lenders willingly agrees to subordinate its claim to a priority lender on all or part of your company`s assets. For example, if you received an equity line of credit for your office real estate, that equity line contained a sub-payment agreement or clause as part of the loan documents. If you are late, the mortgage lender will have the first right to your office building and the equity lender will have a second. Imagine a company that has $670,000 in priority debt, $460,000 in subordinated debt, and total assets of $900,000. The company goes bankrupt and its assets are liquidated at market value – US$900,000….