What does the subordination clause allow?

The subordination clause is a provision in a loan agreement that allows the holder of a loan that is already in first position (the first recorded loan) to agree to take a lower position behind a subsequently recorded loan. This means that if the borrower takes out an additional loan, the new lender can have priority over the first lender in the event of a default.

This clause is often used when a borrower needs to secure a second loan and the original lender agrees to subordinate their claim, allowing for greater access to funds while still maintaining a relationship with the existing lender. Subordination clauses are particularly important in real estate transactions where equity and priority of claims can significantly affect financing options and the risk associated with a property.

The other options do not accurately describe the function of a subordination clause. Changing lenders without penalty pertains to loan transferability or portability, while the ability for a lender to increase interest rates and guaranteeing time-sensitive payments relates to terms within a loan agreement and not the hierarchy of debt obligations that a subordination clause addresses.