In Maryland real estate, a subordination agreement is a legally binding contract that changes the priority of liens on a property. A lien is a legal claim against a property for an unpaid debt. This agreement is most commonly used when a property owner wants to refinance a mortgage or take out a new loan. Essentially, it places one debt or lien in a lower-priority position than another, which is a necessary step in many financial transactions involving real property.
Understanding Lien Priority in Maryland Real Estate
In Maryland, the priority of liens on a property follows the “first in time, first in right” rule. This means liens are prioritized in the order they are recorded in the public land records of the county where the property is located. When a property is sold or foreclosed, the proceeds are used to pay off the lien holders in order of priority. The first mortgage recorded is the “senior lien,” and any subsequent liens are “junior” or “subordinate.”
For example, if a homeowner has a primary mortgage and later takes out a home equity line of credit (HELOC), the primary mortgage has first priority, and the HELOC has second priority. If the homeowner defaults and the property is sold, the primary mortgage lender must be paid in full before the HELOC lender receives any funds.
There are important exceptions to this rule. Property tax liens, for instance, automatically have priority over other liens.1Justia. Maryland Tax – Property Code Section 14-804 (2024) – Unpaid Taxes Are Lien on Real Property; Lien of Unpaid Taxes on Personal Property; Lien on Deferred Property Maryland law also grants “super lien” status to homeowners’ association (HOA) and condominium association (COA) liens, allowing them to take priority over a first mortgage for up to four months of unpaid dues, capped at $1,200.2Justia. Maryland Real Property Code Section 11B-117 (2024) – Liability for Homeowners Association Assessments and Charges on Lots
Purpose of a Subordination Agreement
The purpose of a subordination agreement is to alter the established lien priority. It is a written contract where a creditor with a senior lien agrees to subordinate its position to a new, otherwise junior lien. The senior lien holder voluntarily allows another lender to take its place at the front of the line for repayment.
Lenders require subordination agreements to manage their risk. When a homeowner with an existing second mortgage wants to refinance their primary mortgage, the new lender will require a subordination agreement from the second mortgage holder. Without it, the new refinance loan would be junior to the second mortgage, a risk most primary mortgage lenders are unwilling to take. The agreement ensures the new primary mortgage holds the first lien position.
Common Scenarios Requiring Subordination in Maryland
A frequent scenario for a subordination agreement is a homeowner refinancing their primary mortgage while having a HELOC. When the original mortgage is paid off, the HELOC would automatically move into the first lien position. The new lender will require the HELOC lender to sign a subordination agreement to ensure the new loan is in the first position. Construction loans also frequently involve subordination agreements to prioritize financing for new construction over other existing liens on the property.
Maryland law has streamlined this process in certain residential refinances through “automatic subordination.” If the new loan has a lower interest rate and the principal of the junior lien does not exceed $150,000, the new mortgage automatically gains priority without a formal agreement.3Justia. Maryland Real Property Code Section 7-112 (2024) – Priority of Refinance Mortgage Over Junior Liens This provision simplifies refinancing for many homeowners but does not apply in all situations, such as when the junior lien is a government loan with a 0% interest rate.
Key Elements of a Maryland Subordination Agreement
A Maryland subordination agreement is a formal legal document containing specific information to be valid. Key elements include:
- Identification of all parties: the borrower, the lender whose lien is being subordinated, and the lender whose lien is gaining priority.
- A precise legal description of the property, found on the deed.
- Details of the existing lien being subordinated, including the original loan amount, recording date, and instrument number from county land records.
- Details of the new loan gaining priority, such as the new lender’s name and the loan amount.
- Explicit language stating the intent of the subordinating lender to give up its priority position in favor of the new lender.
Lenders and title companies often use standardized forms, but the specific details within the agreement give it legal force.
The Process of Executing and Recording a Subordination Agreement in Maryland
Once drafted and agreed upon, the subordinating lender must execute the agreement by signing it, which is then notarized to be legally valid. The executed agreement must be recorded in the land records of the Maryland county where the property is located. Recording provides public notice of the new lien priority, making it legally enforceable.4Justia. Maryland Real Property Code Section 3-101 (2024) – Deeds Required to Be Executed and Recorded; Exceptions; Memorandum of Lease
The title company handling the transaction manages the recording, and some lenders may charge fees. For example, the Maryland Department of Housing and Community Development charges a $150 subordination review fee for homeowners with a Maryland Mortgage Program loan who are seeking to refinance.5Maryland Mortgage Program. Maryland Mortgage Program Subordination Procedure