by Nancy Osborne, COO of ERATE
Applying with a lender to refinance your first mortgage when you currently have a home equity loan as well, can be a more time consuming and complex process than simply refinancing with only one mortgage lien secured against your home. The additional steps involved in addressing the second mortgage or HELOC is referred to as the subordination process or technically the re-subordination process. It is essential for the loan officer you are working with to know that you have an existing home equity loan and whether you wish to keep it open after refinancing your first mortgage. Your loan officer, along with your escrow officer and the title company, will need to contact your home equity lender to find out what their subordination process entails, how much time is involved, what documentation is required and what the fee involved will be. Naturally there is a subordination processing fee which typically costs around $250, less than the standard appraisal report but an added cost to be aware of.
A HELOC or home equity line of credit falls into the home equity loan category of second mortgage loans. A HELOC has an adjustable rate, typically tied to the prime lending rate added to a fixed margin and is an open line of credit to draw on during the standard ten-year draw period. Because HELOCs are more popular than their fixed rate lump sum home equity loan counterparts, we will use HELOCs in this example.
To provide some background information, what is referred to as the subordination process involves the priority of liens recorded on a property. A lien is defined as a security interest against a property which is pledged until the debt is repaid. For example, a mortgage loan as well as your county property taxes involve liens recorded against your property. Let’s say you have a first mortgage currently with lender A which is being refinanced and paid off and you have a HELOC which is in second recorded position with lender B. You will be receiving a new first mortgage through lender C replacing lender A and therefore lender B must agree to allow the new incoming mortgage with lender C to assume first position over lender B’s lien position and to re-subordinate their HELOC as a lien in second position. Unless agreed to, the HELOC with lender B would be in a superior lien position to the new first mortgage with lender C due to the earlier recording date of the HELOC lien with lender B.
Your HELOC lender’s subordination department is typically centrally located within the U.S. and is not usually located at your specific bank branch. Therefore, you should count on a day at each end of the process for express mailing documents between the lender and the title company. However, if your current HELOC lender is a credit union, the subordination process will likely occur at your local branch. If your HELOC is currently with a big bank and you have been assigned a banking officer, this person may be able to help speed up the process on your behalf. You should count on the subordination process taking between two to four weeks to complete depending upon the size of your HELOC lender and the volume of subordination requests they receive. Ask your loan officer for the current subordination processing turnaround time.
The underwriting process for the subordination request is very similar to the process for underwriting a first mortgage. You must have sufficient equity in your property to comply with both lender’s guidelines and sufficient income to qualify to make both mortgage payments. Your loan officer and escrow officer will inquire as to which documents the subordination underwriter will require and they will send them accordingly on your behalf. One additional critical item needed to begin the subordination underwriting process is the appraisal report. This can delay the start of the subordination process because it cannot begin until your property inspection is complete.
Once your HELOC lender gives the subordination request the green light to proceed, a completed subordination agreement will be sent to the title company involved in compliance with the escrow officer’s and new first mortgage lender’s instructions. At this point you may proceed with closing your new first mortgage keeping your existing HELOC intact and in second recorded lien position.