Bridge Loans Versus Agency Loans: Purpose, Benefits, and Drawbacks

There are many differences between bridge loans and agency loans that are important to consider when deciding which loan is right for a particular project. Each type of loan has a different purpose and provides its own advantages and disadvantages. A bridge loan is a short-term loan used to bridge the gap when other financing is not yet available, while an agency loan comes from a government-sponsored entity and is usually for a longer term. 

Bridge loans usually have a term of one to three years, and they are typically for an amount at around 65% of the property value. They can be used for different purposes, including specific tasks like paying off construction loans or undergoing renovations on a property. Bridge loans can also be a financing option for purchasing a property in situations where permanent financing is not ready or is not a good option at the moment. In contrast to bridge loans, agency loans are long-term loans used for buying or refinancing property. These loans are issued by government-sponsored agencies such as Fannie Mae or Freddie Mac.

Both bridge and agency loans possess certain advantages and disadvantages that make them an ideal option in certain situations. Bridge loans are ideal short-term loans because they close quickly and are based primarily on the value of the property, as opposed to factors considered in other loans that require more substantial analysis. However, bridge loans often have high interest rates and are recourse loans, presenting a risk of personal liability. On the other hand, agency loans are non-recourse and offer competitive pricing. These benefits come with other disadvantages, as agency loans are difficult to qualify for and may place restrictions on the use of property. Restrictions may, for example, consist of loan provisions that include capital expenditure and maintenance schedules. Agency loans may also come with restrictions on early prepayment and will generally be subject to substantial prepayment premiums. However, because these loans are usually assumable for a qualified buyer, a prepayment may not be required on sale.

Choosing the right loan for the right situation is an important task, as an unsuitable loan could be difficult to pay off and could potentially lead to significant liability, especially if it is a recourse loan. Bridge and agency loans each offer particular benefits and drawbacks that should be carefully considered when choosing a loan. 


About the author

Melanie Tate is a J.D. candidate at Emory University School of Law. Melanie earned her B.A. in literature from Louisiana State University. She is a 2019 – 2020 legal intern at Caiaccio Law Firm.

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