Tennessee Realtor State Practice Exam

When a borrower needs another loan to develop land acquired with an existing loan, what is this situation called?

1. Cross-collateralization

2. Subordination

3. Refinancing

4. Second mortgage

The correct answer is: Subordination

The situation described in the question refers to a borrower seeking an additional loan to develop land that they have already acquired with a previous loan. The correct answer is subordination because this term specifically addresses the relationship between various loans on the same property. In circumstances where the existing loan must be considered subordinate to the new loan, the lender of the new loan assumes priority in the repayment structure over the existing loan. This occurs in scenarios such as land development, where the new financing is necessary to enhance or improve the property. The other options do not accurately define this particular scenario. Cross-collateralization involves using multiple properties to secure a single loan, which is not the focus in this case. Refinancing usually involves replacing an existing loan with a new one under different terms, while a second mortgage is a loan that is secured against the property but typically does not involve the subordination of the previous loan in the same manner as indicated in the question. Thus, recognizing the context of financing in land development, subordination is indeed the correct term to describe the financial rearrangement needed.