Illinois Real Estate Practice Exam

What is the purpose of a subordination agreement between lien holders?

1. Assessment

2. Forfeiture Sale

3. Priority Of Liens

4. Subordination Agreements

The correct answer is: Subordination Agreements

The purpose of a subordination agreement between lien holders is to establish the priority of claims against a property. It essentially allows a lower-priority lien holder (such as a second mortgage) to agree to have their lien rank below a new, higher-priority lien (like a first mortgage). This is significant in the context of securing financing, as it enables the primary lender to know that they will be first in line for repayment in the event of foreclosure. In this scenario, the focus is on the management and hierarchy of debt obligations on a property. The subordination agreement allows updates to the priority of liens without having to discharge existing liens. This is a strategic tool in real estate financing that helps streamline transactions when multiple parties have financial interests in a property. While the other options may relate to real estate and financial transactions, they do not directly pertain to the mechanism of adjusting lien priorities as effectively as a subordination agreement does.