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Subordinate Financing
A second or lower-priority loan taken in addition to the primary mortgage.
Definition
Subordinate financing refers to any loan secured by a property that ranks below the first mortgage in priority. If the property is foreclosed, the first mortgage gets paid before any subordinate liens. Common forms include second mortgages, home equity lines of credit (HELOCs), and seller carryback notes. Subordinate financing can help investors reduce their cash outlay, but it increases the combined loan-to-value ratio and overall risk. Many lenders restrict or prohibit subordinate financing on their loans. When allowed, the first-lien lender typically requires disclosure and may adjust pricing.
How This Relates to DSCR Loans
Most DSCR lenders prohibit subordinate financing. If allowed, the combined LTV (CLTV) is used for pricing, and the additional payment may lower your DSCR.
Related Terms
CLTV
Combined Loan-to-Value — the total of all loans on a property divided by its appraised value.
Lien
A legal claim against a property that must be satisfied before the property can be sold or refinanced.
LTV (Loan-to-Value)
The ratio of a loan amount to the appraised value of the property.
Seller Financing
When the property seller acts as the lender, allowing the buyer to make payments directly to them.
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