Subordinate lien holders can hold up the sale of your home or an attempt to refinance. You can have several encumbrances, or liens, against your property at once so the law must place them in a single file lien to collect against the property. Although the primary lien holder usually has the most power, sometimes it is better for the first lien holder to subordinate his lien.
A subordinate lien holder holds a lower priority in the ranking of debt compared to a primary lien holder. If a borrower defaults on a loan, the primary lien holder is paid first, and then the subordinate lien holder is paid.
Identifying Lien Holder Rankings
The first lien holder is the party with the earliest recorded encumbrance against a property. For most people, this is the original mortgage. Subordinate lien holders, also called second lien holders, have a lien recorded at a later date. Some of the more common subordinate lien holders are issuers of a home equity line of credit or loan and tax assessments.
Characteristics of Subordinate Lien Holders
A subordinate lien holder cannot collect on its debt until the first lien holder receives payment. However, the first lien holder cannot foreclose or repossess a property unless subordinate lien holders agree to the sale. Secondary lien holders can force foreclosure, but this rarely happens, especially in real estate, because the borrower often owes more on the mortgage or original loan than the value of the property.
Subrogation of a Lien
In certain circumstances, the first lien holder relinquishes his position to subordinate lien holders because it is the most profitable move. This sometimes happens when a taxpayer has a lien against his property — federal liens are always the primary lien holder. The Internal Revenue Service might subordinate its position so the taxpayer can refinance his home and take out a larger loan to pay off his tax bill.
Considerations of Subordinate Lien Holders
Pay off bills to avoid having subordinate lien holders that can stop the sale of your property. Some states allow any creditor to place a lien on your home. Subordinate lien holders can be especially troublesome if you want to short-sell your home — sell it on the open market and have the bank cancel any deficiency balance. You can talk to subordinate lien holders about subrogating their position or taking a buyout. For example, home equity line of credit (HELOC) lenders often accept a few thousand dollars to remove their lien.
- Florida State Legislature: Statute 45.032
- CarnahanLaw.com: Subordination of IRS Tax Lien to Other Encumbrance
- Can a Subordinate Lien Be Put on a Mortgage? | Home Guides | SF Gate
- Internal Revenue Service. "Understanding a Federal Tax Lien." Accessed Sep. 18, 2020.
- Experian. "Tax Liens Are No Longer a Part of Credit Reports." Accessed Sept. 18, 2020.
- Experian. "What Affects Your Credit Scores?" Accessed Sep. 18, 2020.
- Federal Trade Commission. "Fair Credit Reporting Act 15 U.S.C § 1681," Page 22. Accessed Sep. 18, 2020.
Russell Huebsch has written freelance articles covering a range of topics from basketball to politics in print and online publications. He graduated from Baylor University in 2009 with a Bachelor of Arts degree in political science.