Imagine a borrower who has purchased his home with a purchase money mortgage loan (Loan A). He then takes out a subordinate mortgage loan on the home (Loan B) to, say, finance home repairs. Between these two loans, he has placed two liens on his property: a primary lien (Loan A) and a junior lien (Loan B).
He then decides to refinance the primary lien with a new mortgage loan (Loan C), but not the junior lien. Which loan then has the higher lien priority? Loan B or Loan C?
Under Virginia law, under certain conditions, it is possible to automatically subordinate Loan B to Loan C when the latter loan is created, by including the following language in bold on the first page of security instrument for Loan C:
“THIS IS A REFINANCE OF A (DEED OF TRUST, MORTGAGE OR OTHER SECURITY INTEREST) RECORDED IN THE CLERK’S OFFICE, CIRCUIT COURT OF (NAME OF COUNTY OR CITY), VIRGINIA, IN DEED BOOK _____, PAGE _______, IN THE ORIGINAL PRINCIPAL AMOUNT OF ______, AND WITH THE OUTSTANDING PRINCIPAL BALANCE WHICH IS _____.” (Va.Code Ann. §55-58.3[B] [West 2012])
The security instrument must also specify the interest rate for Loan C. If executed properly, Loan B will automatically be subordinated, in all extents and purposes, to Loan C as it was to Loan A. This eliminates the need for a separate subordination agreement and streamlines the mortgage lending process.
This automatic subordination may only be done if the following conditions apply:
1. The Property: The property must be a single family dwelling.
2. Loan B: The subordinate mortgage loan must be of a principal amount of $150,000 or less.
3. Loan C: The principal amount secured by the refinance mortgage loan cannot exceed the outstanding balance of Loan A, plus $5,000 (which, consequently, means that Loan C must also be a no-cash out refinance). Also, the interest rate of Loan C may not exceed the interest rate of Loan A.
We have been providing this language on our standard FNMA, FHA, and VA Virginia Deeds of Trust when the subject loan is a refinance and there is a previous junior lien loan amount filled in. In order to more closely following FNMA’s instructions (see “MAY” Change Instruction #15, Instructions to FNMA Form 3047, available at https://www.fanniemae.com/singlefamily/security-instruments) and to more accurately follow Virginia’s statutes, we will be globally mapping a new trigger field (“Virginia Automatic Subordination”) to print this automatic subordination language only when:
- The subject property is located in Virginia;
- The subject refinance loan is first lien and no-cash out;
- The subject property contains only one dwelling unit;
- The loan amount for the current second mortgage has a value and this value is less than or equal to $150,000;
- The loan amount for the loan being refinanced is empty or, if it has a value, the loan amount of the refinance loan is less than or equal to the refinanced loan’s outstanding amount plus $5,000;
- The interest rate for the loan being refinanced is empty or, if it has a value, then the interest rate of the refinance loan is less than or equal to the interest rate of the refinanced loan.
This change will take effect on July 8, 2013. If you have any questions or concerns about this change, please contact Client Support at 1.800.497.3584.
July 1, 2013
Update: Two additional sentences related to Va. Code Ann. §55-58.3[B] have also been printing any time the subject loan is a refinance and there is a previous junior lien loan amount. In order to more closely follow FNMA’s instructions (see “MAY” Change Instruction #13, Instructions to FNMA Form 3047, available at https://www.fanniemae.com/singlefamily/security-instruments) and to more accurately follow Virginia’s statutes, the new “Virginia Automatic Subordination” indicator will also be used to trigger this text under the same conditions listed above:
“The interest rate stated in the Note is _____ percent (_________%). If this Security Instrument is an adjustable rate mortgage loan, this initial rate is subject to change in accordance with the attached Adjustable Rate Rider.”
July 1, 2013