Who benefits from a subordination clause in a seller-carrying mortgage?

A subordination clause in a seller-carrying mortgage benefits the mortgagor, who is the borrower in this scenario. This clause essentially allows the mortgage held by the seller to be subordinated, or ranked below, a new mortgage that the buyer may take out with a bank or other lender.

This is significant because it enables the buyer to secure additional financing to purchase property without the seller’s second mortgage being the first lien against the property. By allowing the seller’s loan to take a lower priority, it reassures the new lender that their first mortgage will be the primary claim in case of default, making it more likely for the lender to approve the loan. Consequently, this arrangement can facilitate the sale of the property and make it easier for the buyer to secure financing, thereby aiding the overall transaction process.

The seller, while they may benefit indirectly by making the property more marketable, does not directly derive benefits from the subordination clause as it primarily acts to protect the interests of the buyer in obtaining additional financing. The lender of the new mortgage benefits by having a first lien on the property, while the buyer's bank also gains from this arrangement through securing their investment.