What does "subordination" mean in real estate?

Subordination in real estate refers to the process of prioritizing one loan over another, which is essential in situations where multiple loans exist on a property. When a loan is subordinated, it means that it becomes secondary to another loan, typically allowing a lender holding a senior loan to have first claim on the property's collateral in the event of a default. This is important for lenders as it defines the order in which they will be repaid. For instance, if a homeowner has a primary mortgage and takes out a second mortgage, the second mortgage is subordinate to the first. Understanding subordination is crucial for navigating complexities in financing, especially in transactions involving multiple liens or refinancing scenarios.