Ace the Arizona Real Estate Exam 2026 – Unlock Your Property Dreams!

A subordination clause is essential in a second construction mortgage to ensure it takes priority over an existing first mortgage. This clause explicitly states that the lender of the second mortgage agrees to subordinate their claim to the first mortgage, effectively allowing the second mortgage to rank higher in terms of priority in the event of a foreclosure.

In essence, when a subordination clause is included, it reorders the hierarchy of liens on the property, meaning that the lender holding the second mortgage can step in front of the first mortgage lender concerning claims on the property. This can be particularly important for construction loans, where new funding is often needed to complete construction projects and may need to establish priority for future financing.

Understanding the function of a subordination clause is critical for real estate professionals, especially when dealing with multiple mortgages on a property. This helps mitigate the risks for lenders and informs buyers about the priority of their financial commitments.