Bridge Loan vs. Agency Loan

Agency Loans and Bridge Loans

Agency loans and bridge loans are two of the most common types of financing used for multifamily projects in the United States. Agency loans are provided by government-sponsored enterprises Fannie Mae and Freddie Mac, while bridge loans can be obtained from a variety of lenders, including banks, financial institutions, and private lenders.

Agency Loan
Perhaps you have heard of Fannie Mae and Freddie Mac before. Whether you have already started your journey as a commercial real estate investor or are planning to, it is important to be familiar with these entities and their offerings. Fannie Mae and Freddie Mac are government sponsored agencies created to provide liquidity to the U.S mortgage market.
These agencies (Hence the name “Agency loan”) play a major role in the financing of multifamily projects. These loans provide fixed interest rates, typically spanning from 5 to 30 years, and are often more competitively priced compared to bridge loans or other commercial loan options. Since this type of debt is issued in fixed rate it is a great option in times of rising interest rates, because the cashflows associated to debt service are easy to predict from the get-go.

Bridge Loan
Unlike Agency Loans, there are several players in the commercial real estate lending markets, including banks, financial entities and private lenders that serve this market. These loans are short term debt obligations, usually ranging from 2 to 36 months and are commonly issued with floating interest rates. Bridge loans interest rates are higher than Agency Loan. Nonetheless they are a great alternative in times of decreasing federal interest rates. The bigger the decline in federal interest rates the bigger the decline in monthly debt payments.
Determining the best option between Agency Loans and bridge loans depends on various factors such as of the market, the nature of the project and borrower’s fundamentals. The following guide provides insights that will help you understand what is the best option under different scenarios.

Rising Federal Interest RatesX 
Property Condition Will Require Heavy Renovation Work X
Low Occupancy and Vacancy Indicators X
Borrower Has Great Credit Score and FinancialsX 
Borrower has a proven track record in similar projectsX 
Borrower is planning to refinance the property X
Borrower is planning to engage in a supplemental loanX 

As you might have concluded, a real-life situation involves a mix of factors instead of isolated scenarios. That is why commercial real estate investment firms, like Apex, often have a team of experts dedicated to combining this variable in order to determine the alternative that maximizes investor cash flows.