First vs. Junior Mortgages

What happens if a house is foreclosed on and there isn't enough money to pay everyone back? Who gets paid first?1. Determining PriorityPriority is generally determined by the date and time of recording in the public records.First Mortgage: The first loan recorded (usually the one used to buy the house). This gets paid first.Junior Mortgage: Any loan recorded after the first one (e.g., a Second Mortgage or Home Equity Line of Credit). These get paid only if there is money left over after the First Mortgage is satisfied.2. Subordination AgreementsSometimes, the lines get switched.Scenario: You have a First Mortgage. You want to refinance it to get a better rate. However, you also have a Second Mortgage on the property.The Problem: If you cancel the First Mortgage and get a new one, the Second Mortgage naturally moves up to the #1 spot (because it was recorded earlier than the new loan). The new lender won't like that.The Solution (Subordination): The holder of the Second Mortgage signs a Subordination Agreement, voluntarily agreeing to stay in the #2 spot (junior position) so the new loan can take the #1 spot (senior position).