Many people purchase a home and finance it with two different mortgages. Usually, there's a first mortgage and a second mortgage, sometimes with the same lender and sometimes with two different lenders. The first mortgage lender appears first on the title and the second mortgage lender appears second. If the homeowner sells the home, or if the home falls into foreclosure, the first lender receives its payoff before any other party, including the homeowner.
Title Report Basics
Counties retain records of who owns what property. This is commonly known as the title. The title of a home records who owns the home and who or what companies recorded liens against the home. Mortgage companies file liens against the titles of properties when they secure their interest in the homes. Title insurance companies create a title report, which lists out the owners and any existing liens against the property. When obtaining a new first mortgage, the mortgage lender reviews the title report, looking for other liens, which may prevent their mortgage from being in first position.
Refinancing with an Existing Second Mortgage
When the title report reflects a second mortgage, the new first mortgage company requests that the second mortgage lender agree to remain in second position. Typically, whoever recorded their mortgage note first is paid first when the home transfers owners. Second mortgage companies realize their loans are not going to be paid first when the home sells. Second mortgage companies often allow a new first mortgage company to jump ahead of them on the title report. This is called re-subordinating the second mortgage.
Re-Subordination Agreement
When a second mortgage lender agrees to re-subordinate their note, they complete a re-subordination agreement for the first mortgage lender. Typically, the first mortgage lender requires this document be executed, although not filed, prior to fully approving the new first mortgage. Once the loan receives full approval and the refinance closes, the title company records the re-subordination agreement along with the new first mortgage note with the county.
General Approval Guidelines
The first mortgage lenders restrict the amount of the first mortgage when there is a second mortgage present on the title. Most first mortgage lenders do not allow a combined first and second mortgage balance that exceeds the value of the home. The second mortgage company wants to ensure the balance of the new first mortgage does not exceed its limits either. Typically, first mortgages with an existing second mortgage limit the new loan to between 70 and 90 percent of value, depending upon the financed property type.
