Tennessee Realtor State Practice Exam

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What does the term 'subordination' refer to in real estate financing?

Lowering the interest rate
Changing the property title
Prioritizing a junior loan over a senior loan
Forgiving a loan

The correct answer is: Prioritizing a junior loan over a senior loan

Subordination in real estate financing refers to the process of changing the priority of claims in the event of a default or foreclosure. Specifically, it involves prioritizing a junior loan over a senior loan, meaning that the junior lender can have a higher claim to the proceeds from the sale of the property than the senior lender. This often occurs as part of a negotiation process when a property owner seeks additional financing. By subordinating the senior loan, the junior lender assumes more risk, but it can enable the property owner to secure additional funding that they may not have otherwise been able to obtain. The other options involve concepts that, while related to real estate financing, do not accurately describe subordination. Lowering the interest rate pertains to the terms of a loan rather than its priority. Changing the property title involves ownership issues, which are separate from financing priorities. Forgiving a loan relates to debt cancellation, which again does not touch on the concept of subordination in the context of loan priority.