FAQ About Virginia and Maryland Auto Subordination Guidelines

Purchasing a home is typically the largest investment of your lifetime. Throughout your homeownership, there may be times when you wish to take out a subordinate debt, such as a second mortgage, equity loan, or home equity line of credit, in order to fully purchase your home or complete other projects.

When you have a second mortgage and you decide to refinance your first mortgage, automatic subordination is an option that may allow you to keep your second mortgage open and active. It is important that you understand the guidelines involved in such a transaction, so SMART has prepared frequently asked questions for you to learn more.

Read below for an overview of a subordinate mortgage and specific subordination guidelines for Virginia and Maryland homeowners, or click a link below to jump to that section.

• What is a Subordinate Mortgage?
• When would a first mortgage become subordinate?
• What is Automatic Subordination?
• What are the guidelines for Virginia?
• What are the guidelines for Maryland?

What is a Subordinate Mortgage?

A subordinate mortgage is a loan that has a lower lien priority status than the first recorded lien or debt against a specific property. Typically, the loan you take out to purchase your home is the first recorded and therefore has the first lien priority on your deed after you close. In other words, if you default on your loan or sell your property, you must repay this first mortgage with any proceeds from the sale first.

Any loans, lines of credit, or liens that are taken out after that first mortgage then become subordinate to the initial loan. They are repaid with any remaining proceeds after paying off the first mortgage, in the order in which they were recorded. Most mortgage agreements document this process in their subordination clauses.

When Would a First Mortgage Become Subordinate?

There may be a situation in which your first mortgage becomes subordinate to another loan or debt. When you refinance your first mortgage, for example, the next recorded debt moves into the first priority position for repayment.

Or, the lender of a new mortgage, lien, or line of credit may request that the first recorded debt become subordinate (or sometimes called “junior”) to the new debt, in which case you must request a subordination agreement from the first lender. This is an additional risk to the first lender, so it may not always agree to your terms.

What is Automatic Subordination?

Automatic Subordination of junior mortgages takes place when the junior mortgage is subordinated to a new first mortgage pursuant to the auto subordination statute, without a subordination agreement. To achieve this, you must follow the statutory guidelines for your jurisdiction and also discuss it with your new lender.

What Are the Guidelines for Virginia?

In order for automatic subordination to occur in Virginia, the following statutory guidelines must be met:

1. The property may not contain more than one dwelling unit;
2. The original principal amount of the subordinate mortgage must not exceed $150,000.00;
3. The subordinate mortgage must be subordinate in priority as a result of (i) recordation after the mortgage to be refinanced, (ii) a recorded subordination agreement, or (iii) automatic subordination pursuant to statutory provisions in connection with a previous refinance;
4. The debt owed under the existing prior mortgage to be refinanced will be paid in full;
5. The principal amount secured by the refinance mortgage will not exceed the current principal balance of the existing prior mortgage plus $5,000.00;
6. The interest rate must be stated in both the refinance mortgage and the existing prior mortgage;
7. The interest rate stated in the refinance mortgage must not exceed the interest rate stated in the prior mortgage. The automatic subordination statute will not apply if either the existing or refinance mortgage secures an adjustable rate note, and if this is the case, you must obtain and record subordinations of all junior loans even when the initial interest rate of the new note is less than the old note;
8. A second mortgage does not qualify for automatic subordination if it secures a promissory note payable to any county, city, town, agency, authority, or political subdivision of the Commonwealth of Virginia if that subordinate mortgage is financed pursuant to an affordable dwelling unit ordinance (see §15.2-2304 or §15.2-2305) or program authorized by federal, state, or local ordinator or resolution; and
9. Such refinance mortgage states on the first page thereof in bold or capitalized letters:
10. "THIS IS A REFINANCE OF A (DEED OF TRUST, MORTGAGE OR OTHER SECURITY INTEREST) RECORDED IN THE CLERK'S OFFICE, CIRCUIT COURT OF (NAME OF COUNTY OR CITY), VIRGINIA, IN DEED BOOK ______, PAGE ______, IN THE ORIGINAL PRINCIPAL AMOUNT OF ______, AND WITH THE OUTSTANDING PRINCIPAL BALANCE WHICH IS ______."

See Section 55.1-319 of the Code of Virginia

What Are the Guidelines for Maryland?

In order for automatic subordination to occur in Maryland, the following statutory guidelines must be met:

1. The principal amount secured by the Junior Mortgage does not exceed $150,000;
2. The principal amount secured by the Refinance Mortgage does not exceed the unpaid, outstanding principal balance secured by the First Mortgage plus an amount to pay closing costs not exceeding $5,000; and
3. The Refinance Mortgage contains the following statement in bold or CAPITALIZED letters:
4. “THIS IS A REFINANCE OF A DEED OF TRUST/MORTGAGE/OTHER SECURITY INSTRUMENT RECORDED AMONG THE LAND RECORDS OF ____ COUNTY/CITY, MARYLAND IN LIBER NO. __ FOLIO __, IN THE ORIGINAL PRINCIPAL AMOUNT OF ___, AND WITH THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF _____. THE INTEREST RATE PROVIDED FOR IN THE EVIDENCE OF INDEBTEDNESS SECURED BY THIS REFINANCE MORTGAGE IS LOWER THAN THE APPLICABLE INTEREST RATE PROVIDED FOR IN THE EVIDENCE OF INDEBTEDNESS SECURED BY THE DEED OF TRUST/MORTGAGE/OTHER SECURITY INSTRUMENT BEING REFINANCED.”

See MD Real Prop Code § 7-112 (2013)

For additional information on this topic contact Evelyn Miller, Partner, at 202-753-7400.

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