A subordination agreement is a legal contract that helps lenders organize their priority in regards to a particular loan. It is a legal document that is used when a borrower has multiple loans with various creditors and needs to prioritize the order in which each creditor gets paid in the event of a default.

The agreement essentially establishes a hierarchy of payment for different creditors. It determines which lender has the primary claim and which ones have secondary or subordinate claims in the event of a borrower`s default. This means that if the borrower defaults on their loan payments, the primary lender is the first in line to receive payment from the sale of the borrower`s assets or collateral. The secondary or subordinate lenders are then paid in order of priority.

Subordination agreements are commonly used in situations where a borrower is seeking additional financing or refinancing. For instance, if a borrower wants to take out a second mortgage, they will need to obtain a subordination agreement to ensure that the new lender`s claim is subordinate to the first mortgage holder`s claim.

In a typical subordination agreement, the borrower agrees to prioritize the first lender`s claim over any other claims. This means that if there is a default, the first lender gets paid first, and the second lender gets paid second. The borrower also agrees to provide the first mortgage holder with permission to approve any future refinancing or additional financing that the borrower may seek.

Subordination agreements are often used in commercial real estate transactions, where multiple lenders may be involved. In these cases, the subordination agreement ensures that all parties involved are aware of their respective priority in the event of a default. This helps to reduce the risk of default and provides a clear plan of action for all parties involved.

In summary, a subordination agreement is a legal contract that helps lenders organize their priority with regards to a particular loan. It establishes a hierarchy of payment for different creditors, ensuring that each lender is paid in the correct order in the event of a default. Subordination agreements are commonly used in situations where a borrower is seeking additional financing or refinancing, and they help reduce the risk of default by providing a clear plan of action for all parties involved.