What is a subordination agreement and why do I need it for my Miami IRRRL?
A subordination agreement is a legal document that establishes one debt as ranking behind another in priority for collecting repayment from a debtor. In the context of a mortgage, it determines which lender gets paid first if you sell the home or go into foreclosure. The lender in the first lien position has first claim on the property's value, while the lender in the second lien position only gets paid after the first is fully satisfied.
When you refinance your primary mortgage with a VA Interest Rate Reduction Refinance Loan (IRRRL), the new loan is required to be in the first lien position. It's a non-negotiable rule for lenders. If you have an existing second mortgage or a Home Equity Line of Credit (HELOC), that loan currently sits in the second lien position behind your original VA loan.
Here’s the challenge for a homeowner in Miami: when you pay off your original VA loan with the new IRRRL, the second mortgage technically moves into the first position. No new lender will agree to this arrangement, as it puts them at significantly higher risk. They won't fund your IRRRL if they are second in line.
To solve this, your second mortgage holder must sign a subordination agreement. This document legally re-establishes their loan in the second position, placing your new VA IRRRL firmly in first. It’s a formal acknowledgment that they agree to 'subordinate' their lien to the new one. Without this agreement, your IRRRL cannot proceed.
Why Lenders Insist on First Position
Imagine a home in Miami is valued at $500,000.
- New VA IRRRL: $350,000
- Existing HELOC: $50,000
If the homeowner defaults and the home is sold in foreclosure for $400,000, the lender in the first position gets paid first.
- With Subordination: The new IRRRL lender receives their full $350,000. The HELOC lender receives the remaining $50,000.
- Without Subordination: The HELOC lender would be in first position and get their $50,000. The new IRRRL lender would only get $350,000, leaving them with a loss. This is why no lender will close an IRRRL without a signed subordination agreement from any junior lienholders.
Can I still get a VA IRRRL in Orlando if I have a HELOC?
Yes, you absolutely can get a VA IRRRL in Orlando if you have a HELOC, but it’s contingent on securing that subordination agreement. A HELOC is a common type of second lien, and lenders are very familiar with the process. The success of your refinance depends almost entirely on the policies and cooperation of the financial institution that holds your HELOC.
Some large banks and credit unions have streamlined internal processes for handling subordination requests. They review the transaction details, such as your new loan amount and the property's value, to ensure their position isn't significantly worsened. If the numbers make sense and you have a good payment history with them, they are likely to approve the request.
However, other smaller lenders or credit unions may be less willing or equipped to handle these requests. They might:
- Have strict policies against subordination.
- Lack a dedicated department to process the paperwork, causing long delays.
- See the refinance as an opportunity to have their high-interest loan paid off and be unwilling to cooperate.
It is crucial to understand that your HELOC lender is under no legal obligation to agree to subordinate their lien. Their decision is based on their own internal risk assessment. An experienced mortgage professional can often help navigate these conversations and present the request in a way that is most likely to be approved.
Who is responsible for contacting my second mortgage lender?
Typically, your new mortgage lender or the title company handling the closing is responsible for formally requesting the subordination agreement from your second lien holder. This is not a task you are expected to handle on your own, as it involves specific legal paperwork and communication between financial institutions.
Here’s the general workflow:
- You Provide Information: During your IRRRL application, you must disclose the existence of your second mortgage or HELOC. You'll provide the lender's name, your account number, and contact information.
- The New Lender or Title Company Initiates: They will send a formal subordination request package to your second lien holder. This package includes details about your new proposed loan, a copy of the appraisal (if one was needed), and the specific subordination agreement for them to sign.
- The Second Lien Holder Reviews: Their underwriting department will review the package. They assess the new loan-to-value (LTV) ratio to ensure they are still in a secure position. For example, if your home value has decreased, they may be more hesitant to subordinate.
- You May Need to Get Involved: While the official request comes from the lender, you may need to follow up with your HELOC provider. Sometimes, a call from you—the customer—can help expedite the process or resolve any roadblocks. You may also need to provide authorization for them to speak with your new lender.
It’s a collaborative effort, but the procedural heavy lifting is done by the mortgage and title professionals.
What happens if my second lien holder refuses to subordinate?
If your second mortgage or HELOC lender denies the subordination request, your VA IRRRL comes to a halt. However, you are not entirely out of options. Here are the potential paths forward:
Option 1: Pay Off the Second Lien. This is the most straightforward solution. You can use personal savings to pay off the balance of the second mortgage or HELOC before you close on the IRRRL. Once the lien is removed, there is no longer a need for subordination. The main drawback is that this requires having a significant amount of cash available.
Option 2: Ask Your New Lender for a 'Cash-Out' Refinance Instead. A standard VA IRRRL cannot be used to take cash out to pay off other debts. However, you could switch your loan application to a VA-backed cash-out refinance. This loan type allows you to borrow more than you owe on your primary mortgage and use the difference to pay off the HELOC. The downside is that cash-out refinances often have slightly higher interest rates and funding fees compared to an IRRRL. (The data, information, or policy mentioned here may vary over time.)
Option 3: Find a New Primary Lender. Some lenders have more experience and better relationships when it comes to navigating tricky subordination agreements. A skilled mortgage broker who works with dozens of lenders may be able to place your loan with one that is willing to take on the challenge or has a history of success with your specific second lien holder.
Option 4: Re-evaluate the Refinance. If none of the above options are feasible, you may have to postpone your IRRRL. You could wait until you have saved enough to pay off the second lien or until property values in your area increase, which might make the second lien holder more comfortable with subordinating.
Does this process add extra time and cost to my VA IRRRL?
Yes, seeking a subordination agreement almost always adds both time and cost to the VA IRRRL process.
Time Delays
A standard IRRRL can often close in 30 days or less. When subordination is required, the timeline can easily extend to 45-60 days or more. (The data, information, or policy mentioned here may vary over time.) The delays come from several factors:
- Lender Response Time: The second lien holder may take weeks to respond to the initial request.
- Paperwork Processing: Their internal underwriting and legal departments need time to review and approve the request.
- Corrections and Communication: Any errors in the paperwork or back-and-forth questions between the lenders will add further delays.
It’s critical to start the process with the expectation of a longer closing period.
Additional Costs
Your second lien holder will charge a fee to process the subordination request. This is to cover their administrative and legal costs for reviewing the file and preparing the document. These fees are not standardized and can vary widely, but they typically fall in the range of $200 to $500. (The data, information, or policy mentioned here may vary over time.) This fee is usually paid at closing and will be itemized on your Closing Disclosure.
Are there any lenders who specialize in IRRRLs with second liens?
While most lenders can process an IRRRL with a subordination agreement, not all are equally skilled or willing to do so. Large, high-volume 'call center' style lenders may view these loans as too time-consuming and unprofitable, leading them to deny the application upfront or provide poor service.
Experienced mortgage brokers and independent mortgage banks are often your best bet. Here’s why:
- Experience: They have encountered this situation many times and have established processes and contacts to manage it effectively.
- Multiple Lender Options: A broker has access to a wide network of lenders. If one lender’s guidelines are too restrictive, they can pivot to another that is more flexible with subordinations.
- Proactive Communication: They understand the potential for delays and are more proactive in following up with all parties to keep the file moving forward.
When interviewing potential lenders for your IRRRL, be upfront about your second mortgage. Ask them directly about their experience with subordination agreements and how they handle the process. Their answer will give you a good indication of their expertise.
Could I pay off the second mortgage with the IRRRL?
This is a critical point of confusion for many veterans. With a standard VA Interest Rate Reduction Refinance Loan (IRRRL), you cannot take cash out to pay off a second mortgage. The IRRRL is a 'rate-and-term' refinance designed solely to lower your interest rate or change your loan term. The VA limits the loan amount strictly to what is needed to pay off the existing VA loan, cover closing costs, and the VA funding fee. (The data, information, or policy mentioned here may vary over time.)
You cannot increase the loan amount to consolidate debt. Attempting to do so would change the loan program from an IRRRL to a VA-backed cash-out refinance, which comes with different rules, a potentially higher interest rate, and a higher funding fee. (The data, information, or policy mentioned here may vary over time.) If your primary goal is to lower your interest rate on your main mortgage, sticking with the IRRRL and handling the second lien separately is usually the most cost-effective path. Navigating a VA IRRRL with a second lien requires expertise. If your lender can’t handle the subordination process, connect with a mortgage strategist who specializes in complex VA loan scenarios to explore all your options and ensure a successful refinance.
The path to a lower rate with a VA IRRRL is clear, even with a second lien in the mix. Our team specializes in these complex scenarios and can handle the subordination process for you. Take the first step toward significant savings and apply now.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
References
VA Interest Rate Reduction Refinance Loan (IRRRL)
[What is a subordination agreement?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-subordination-agreement-en-19 subordination/)
