Florida Broker Practice Exam

What is the purpose of a subordination agreement?

1. To allow a junior lien holder's interests to move ahead of a prior lien

2. To discharge a lien on the property

3. To convert a mortgage lien into a judgment lien

4. To waive all liens on a property

The correct answer is: To allow a junior lien holder's interests to move ahead of a prior lien

A subordination agreement primarily serves the purpose of allowing a junior lien holder's interests to have priority over a prior lien. In real estate transactions, liens are often established in a specific order of priority, which determines the sequence in which claims against the property will be paid in the event of a foreclosure or sale. When a subordination agreement is executed, it modifies this priority order by permitting the junior lien holder—who typically has lesser priority in terms of claim on the property—to elevate their claim above that of the senior lien holder. This is particularly beneficial in refinancing scenarios where a new loan may need to take precedence over existing loans, ensuring that the lender providing new financing has a primary claim to the property. Understanding this mechanism is essential in real estate transactions because it impacts the risk and security of the lenders involved, and can also affect the property owner’s ability to secure additional financing.