Bridge loans are used by seniors to cover their care costs while they wait for access to other funds, such as a pension or the proceeds of a property sale. There are roughly 800,000 seniors living in assisted living facilities in the United States, and it’s estimated that 7 out of 10 Americans will require assisted living care at some point in their lives. Bridge loans can be helpful for seniors who are unable to cover the cost of care out of their current income or savings.
A bridge loan is a short-term loan that lenders approve quickly for qualifying applicants, allowing them almost instant access to necessary funds. Lenders’ terms vary, but it’s common for the applicant to borrow up to 80% of their home’s value. Interest rates are higher than for traditional loans (typically above the prime rate) because bridge loans are usually taken over shorter time periods — often six months to a year. Consequently, they’re not a good long-term solution but can help you overcome short-term financial issues.
You’ll need to give the lender enough information to calculate your debt-to-income ratio. This will include evidence of your income as well as your credit score and the equity you have in your home. If your home equity is below 20%, your application will likely be rejected, as your loan-to-value ratio will be too low. You should expect the lender to ask you to specify what the loan’s purpose will be.
Interest on a bridge loan can be as low as 1-2%, but can also be higher. How much you’ll pay will be influenced by the type of bridge loan you apply for. There are two types: a lump sum payment and a line of credit (which is the most common type). A typical credit line is $20,000 to $30,000, with the borrower taking out funds when needed and paying interest only on what they’ve used.
There will be closing costs to cover the lender’s administration fees. They’re typically 3-6% of the amount borrowed and paid by the buyer and seller, with the buyer usually paying the most. You may be able to negotiate closing costs with the seller, particularly if you’re concerned about finding the money you’ll need when the loan ends. You’ll also pay the lender’s processing costs, known as the origination fee. This is typically 0.5-1% of the total loan amount. The lender may want your home’s market value appraised by a real estate appraiser. This is more likely if you’re buying a home, rather than applying for a bridge loan to cover senior care costs.