If you want to buy a new home, refinance your existing home, or you are a real estate investor who is in need of quick cash, seeking a loan is the first thing that comes to your mind. Bridge loans and agency loans are two types of loans that are popular in the real estate sector. In this guide, we are going to look at what they are, their objectives, and the difference between agency lending and bridge debt in relation to real estate investment.
What is a bridge loan?
Bridge debt loans are short-term financing solutions that are used to meet your instant financial needs when there is an immediate demand for cash but it’s not available. When used in real estate investment transactions, a bridge loan as its name suggests is used to “bridge the gap” by eliminating any cash crunch that might exist when a real estate investor is purchasing and selling a multifamily property at the same time.
Lenders package bridge debt loans in two options to make it easier for borrowers seeking this short-term financing option.
- Holding two mortgage loans option- Where an investor can borrow the difference between your current mortgage loan balance and up to 80% of their multifamily property value. The money in the second loan is used as the down payment for your second property while the first mortgage remains intact and you will only pay it once you successfully sell your first home.
- Combining both mortgages into one- This is where the lender allows you to borrow a large amount of bridge loan of up to 80% of your multifamily property value. Doing so helps you clear the balance of your first mortgage and then apply the second one towards the down payment of your second home.
Benefits of bridge loans
Bridge loans do not require a complex structure for one to qualify. Unlike agency loans which are only approved when an investor has a stabilized real estate asset, bridge lenders issue their loans on value-added projects that are in the pre-stabilization stage.
Bridge loans also have a faster closing process, offer more leveraging points like the contingency-free offer, and are non-recourse.
Drawbacks of bridge loans
Since bridge loans are short-term, easy to secure, and of high risk, they come with higher interest rates compared to conventional loans. The good thing with bridge loans is that the borrower is not required to make monthly repayments since the loan is repayable in full at the tail end of the loan term.
What are agency loans?
Agency loans are long-term mortgage financing options that are issued by two government-backed financial agencies known as Freddie Mac and Fannie Mae. They consist of mortgage investors who specialize in buying mortgages from lenders and package these loans into mortgage-backed securities that are then resold to other investors in the secondary markets.
Benefits of agency loans
Since agency loans are long-term, they attract low-interest rates as they are considered low risk. They are usually offered for 7-10 years and they attract a 1% interest rate.
Drawbacks of agency loans
- They are only approved for stabilized assets in the sense that your property must have a 90% occupancy rate for at least 90 days for you to qualify.
- Lenders require borrowers to have a high credit score of at least 660
- Liquidity of at least 10% of the total loan amount is required for the borrower to qualify