Agency Loan vs. Non-Agency Loan: Which Is Right for You?
Understanding your loan options is essential when buying a home or investing in RV parks, mobile home parks, or multifamily properties.
Agency loans are a popular financing choice backed by government-sponsored enterprises created by government-sponsored enterprises like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA).
These offer several advantages over conventional financing options, including:
- more favorable loan-to-value ratios of up to 75-80%
- nonrecourse financing
- competitive interest rates
These features make agency loans a stabilizing force in the housing market while providing investors with reliable financing options.
In this article, we’re going to discuss, in detail, the difference between agency and non-agency loans and which is best for your situation.
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Sign up for my newsletterWhat Is an Agency Loan?
An agency loan is a type of mortgage financing backed by government-sponsored enterprises (GSEs) like Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie Mae (GNMA).
These loans help stabilize the housing market by providing competitive interest rates, flexible terms, and non-recourse financing for multifamily and commercial real estate investors.
The Role of Government-Sponsored Enterprises (GSEs)
GSEs create liquidity in the secondary mortgage market by purchasing mortgage-backed securities. This system allows lenders to offer lower rates and better loan terms to borrowers. Key federal agencies involved in agency lending include:
- Fannie Mae – Purchases and guarantees conventional mortgage loans.
- Freddie Mac – Provides similar services for financial institutions.
- Ginnie Mae – Guarantees federally insured loans such as FHA loans and VA loans.
Why Choose Agency Financing?
Agency loans are widely used due to their favorable terms and lower interest rates compared to conventional bank loans. These loans are especially beneficial for investors in student housing, affordable housing, and urban development projects.
Advantages of Agency Loans
#1. Lower Interest Rates
Agency loans often provide better rates than private lenders or CMBS loans.
#2. Higher Loan-to-Value (LTV) Ratios
Typically up to 75-80%, allowing investors to maximize leverage.
#3. Non-Recourse Loans
Protects investors from personal liability if the property defaults.
#4. Flexible Terms
Longer amortization periods and customized lease terms.
#5. Liquidity and Stability
Helps the housing market remain stable even in uncertain economic conditions.
Join the Passive Investors CircleTypes of Agency Loans
Conventional Loans (Fannie Mae & Freddie Mac)
- Suitable for multifamily properties and real estate investors.
- Requires a 660-680 minimum FICO score.
- Competitive interest rates with standard loan products.
FHA Loans (Federal Housing Administration)
- Designed for homebuyers and multifamily financing.
- Lower payment requirements but require mortgage insurance.
- Available for affordable housing and urban development.
VA Loans (Department of Veterans Affairs)
- Available for eligible military personnel and veterans.
- No down payment or private mortgage insurance.
- Backed by the full faith and credit of the U.S. government.
USDA Loans (United States Department of Agriculture)
- Supports rural homeownership and multifamily market development.
- Offers 100% financing with lower rates than conventional loans.
Bridge Loans
- Short-term financing for real estate investors looking to refinance or stabilize a property.
- Used to reposition properties before securing long-term agency financing.
Related: Pros and Cons of Bridge Loans: How They Work in Real Estate
Agency Loans vs. Non-Agency Loans
Not all loans qualify for agency backing. Some real estate investors may choose non-agency loans, which have different requirements:
| Feature | Agency Loans | Non-Agency Loans |
|---|---|---|
| Interest Rates | Lower | Higher |
| Loan Terms | Longer | Shorter |
| Credit Score | 660+ | Varies |
| Recourse | Non-recourse | Recourse |
| Government Backing | Yes | No |
| Property Types | Standard multifamily | Specialized or high-risk properties |
When to Consider Non-Agency Loans
Non-agency loans are ideal for financing commercial real estate properties that do not meet agency guidelines. They offer greater flexibility for an investment portfolio but come with a higher default risk.
They are also suitable for investors who require specialized business financing, such as syndicated or bilateral loans.
How Agency Loans Impact the Housing Market
Agency loans play a crucial role in keeping mortgage rates stable and supporting affordable housing. They create liquidity in capital markets, ensuring that lenders have the funds to keep issuing new loans.
During economic downturns, agency-backed financing is more reliable than private lenders or bank financing, helping prevent collapses in the real estate market.
Key Considerations Before Applying for an Agency Loan
Before choosing agency lending, investors should assess:
- Investment Goals – Long-term vs. short-term financing needs.
- Property Types – Not all properties qualify for agency-backed loans.
- Loan Terms & Monthly Payments – Understanding total loan amount, amortization, and payment schedules.
- Debt Obligations & Risk Management – Evaluating personal liability and non-recourse options.
Investor Considerations
Agency loans are lower risk due to government backing, ensuring investors get paid even if you default. Non-agency loans carry higher risk but may offer better returns.
Without government support, lenders charge higher interest rates to offset risk, making your loan more expensive. Private lenders may keep these loans or sell them as mortgage-backed securities.
FAQs
What are the qualifications necessary to obtain an agency loan?
To qualify for an agency loan, you typically need a credit score of at least 620-640.
Income verification is required, with debt-to-income ratios generally capped at 43-45%.
Property standards must meet agency guidelines through proper appraisal and inspection.
Down payment requirements range from 3-25% depending on the specific agency program.
Borrowers must also demonstrate stable employment history, usually requiring two years of consistent work experience.
How does an FHA loan relate to agency-backed financing?
FHA loans are a type of agency loan backed by the Federal Housing Administration. These loans are government-insured rather than purchased by GSEs like Fannie Mae or Freddie Mac.
FHA loans offer more flexible qualification standards, including lower credit score requirements (as low as 500 with a 10% down payment).
They typically require only 3.5% down for borrowers with credit scores above 580.
These loans include mortgage insurance premiums that protect lenders against default, making them accessible to first-time homebuyers.
What are the primary distinctions between agency and non-agency mortgage loans?
Agency loans are backed by government-sponsored enterprises like Fannie Mae, Freddie Mac, or government agencies like FHA and VA. Non-agency loans, also called non-conforming loans, don’t have this government backing.
Agency loans must meet specific standardized criteria including loan limits, documentation requirements, and credit standards.
Non-agency loans offer more flexibility for borrowers who don’t fit standard agency guidelines.
Risk levels differ significantly—agency loans carry lower risk due to government guarantees, while non-agency loans typically have higher interest rates to offset increased lender risk.
Can you explain the role of agency loans in financing multifamily properties?
Agency loans are popular for multifamily properties because they offer favorable loan-to-value ratios up to 75% with 1.25% amortization. This allows investors to maximize leverage while maintaining manageable payments.
Most agency multifamily loans are nonrecourse, protecting borrowers from personal liability. This is particularly valuable for large-scale investment properties.
These loans often feature competitive interest rates and longer terms (up to 30 years) compared to traditional commercial loans, providing stability for long-term investors.
What is considered a standard agency loan in real estate financing?
A standard agency loan refers to conventional mortgages that conform to the guidelines established by Fannie Mae and Freddie Mac. These loans have maximum loan limits that vary by location ($726,200 in most areas for 2023).
Standard agency loans typically require minimum credit scores of 620, debt-to-income ratios below 45%, and down payments of at least 3-5% for primary residences.
Documentation requirements include proof of income, assets, employment verification, and property appraisal meeting agency standards.
How do agency loans compare to traditional bank loans in terms of structure and requirements?
Agency loans often offer more favorable terms than traditional bank loans. These terms include lower interest rates and higher loan-to-value ratios. This makes them more accessible to a broader range of borrowers.
Traditional bank loans may have more stringent credit and income requirements. However, they can offer more flexibility for unique situations that don’t fit agency guidelines.
While bank loans typically have shorter terms (15-20 years), agency loans commonly offer 30-year fixed-rate options. These provide lower monthly payments and improved cash flow for borrowers.