How to Get a HELOC Subordination Agreement When Refinancing

If you have a second mortgage of any type – a HELOC, home equity loan, or construction lien – you may need to “re-subordinate” it if you refinance.

Getting a subordination agreement is required. But how do you get one?

Here’s how to navigate the subordination process when you refinance.

Why Do You Need a Subordination Agreement?

First of all, you only need a subordination agreement if keeping the second mortgage. You skip this step when consolidating the second mortgage into the new refinance.

A subordination agreement places the HELOC back in second position behind the new first mortgage.

Without a subordination agreement, the HELOC or home equity loan would pop into first-lien position the moment you pay off the existing first mortgage. In case of loan default, the second mortgage would be paid off first.

This is unacceptable to the new first mortgage lender because it wants to be in first position.

How Do You Get a Subordination Agreement?

Luckily, the refinance and HELOC lenders will do most of the heavy lifting to get the agreement.

The refinance lender will put together a “subordination package.” This includes all the documents the HELOC lender needs to subordinate. Documentation varies by HELOC lender as discussed below.

As the borrower, you are not responsible for finding a subordination template. The HELOC lender will have their own.

If all goes as planned, the HELOC lender sends the completed agreement to your refinance lender. The agreement becomes part of the final loan document package.

At closing, the HELOC moves to second position, meeting the refinance lender's requirement.

Documentation Needed for a Subordination

The HELOC lender may request a number of documents including the following:

• Terms of the new loan

• A loan approval

• The refinance loan application

• Refinance Loan Estimate (LE) form

• FHA- or VA-specific documents

• Income verification

• Appraisal and title

• Your permission to subordinate via a signed authorization form

• A fee

• A credit check

• Other financial information

The refinance lender should have most or all the items needed for the subordination package.

Will The Second Mortgage Lender Deny the Subordination?

There’s always a chance the HELOC or home equity loan lender could refuse to re-subordinate their loan, such as when:

• Your credit or financial picture has worsened since you got the HELOC

• You are taking cash out thereby increasing the loan-to-value beyond the HELOC lender's maximum

• The HELOC lender doesn’t like the terms of the new loan: it has a balloon payment, adjustable-rate feature, or an interest-only option.

• You’ve moved out of the home since you got the HELOC

• The HELOC was originally in first position

Typically, HELOC lenders know that part of being a HELOC lender is issuing subordination agreements. They usually have no problem subordinating.

You will probably have no issues, but it's good to be prepared. Check with your HELOC lender ahead of time before applying for the refinance.

The HELOC Lender May Require a Line Reduction

Your HELOC was originally issued at a certain loan-to-value.

If your home’s value decreases or the new loan amount increases, the HELOC lender may require you to reduce the available credit line.

For example, you have a $100,000 HELOC. Your refinance loan balance will rise by $20,000. The HELOC lender may require you to reduce your available credit line to $80,000.

If the full $100,000 were borrowed, you may need to pay down the HELOC to receive the subordination.

It could be worth checking with your HELOC lender before spending time and money on a refinance. Make sure they will be able to subordinate the loan under new terms.

How Much Does a Subordination Cost?

Your HELOC lender may charge a subordination fee anywhere from $50 to $500 or more.

This is not your refinance lender's fee; it’s a fee from your HELOC provider to work up the subordination agreement.

Your refinance lender needs to include the fee with the subordination request. So you may have to deliver a check to the refinance lender, wire the fee to the HELOC lender, or simply have your HELOC lender collect the fee from your line of credit.

How Long Does a Subordination Take?

If you’re refinancing, consider NOT locking lock your loan until the subordination is received or at least in process.

Subordinations can take 10 business days or longer. If rates drop, HELOC lenders will get backed up processing an onslaught of subordination requests. In these cases, they could take a month.

The HELOC lender won’t pay for lock extensions, expired appraisals, or new credit reports. Have your refinance lender request the subordination immediately so you can close your refinance sooner.

You can help too: call your HELOC lender and let them know that you’re waiting on the subordination.

Subordinations: Never Fun; Always Necessary

A subordination agreement from your HELOC lender is never fun to get, but you can’t refinance without it.

Make sure your refinance lender is proactive about ordering and checking on status.

With some planning, your refinance can still close quickly.