In real estate, what does the term 'subordinate lien' refer to?

The term 'subordinate lien' specifically refers to a loan that is placed lower in priority than another lien on the same property. In the context of real estate, liens are claims against a property that are used to secure debt. When a lien is subordinate, it means that in the event of a default and subsequent liquidation of the property, the subordinate lienholder will be paid after the primary lienholder has been satisfied.

For example, if there is a first mortgage on a property (the primary lien), any subsequent loans or liens placed against the property—like a second mortgage or a home equity line of credit—would be considered subordinate liens. This hierarchy of lien priority affects the risk and potential recovery for lenders, as subordinate lienholders face greater risk compared to primary lienholders, especially in cases of foreclosure or property sale. Understanding this concept is crucial for real estate professionals when advising clients on financing options and risks associated with property encumbrances.