When you walk into a new condo development, the attending sales people will make the purchase of your condo sound so easy to you, especially if you’re a starter home buyer. There is really nothing that can stand in the way of you being able to purchase (and to afford) the most beautiful condo in the world. It’s that new home you’ve been dreaming of since you were little, so you must make this work for you, right?
Most condo projects in Costa Rica are pre-qualified by the banks, so the developer has all the ducks in a row for you to become a new home owner the easy way, they say. That doesn’t necessarily mean it’s as easy as they make it look.
The purchase of a Costa Rica home is an important purchase, maybe the most important one you will make in your life. If you’re a first time rookie home buyer, applying for a mortgage and getting yourself into such a large debt, this home purchase might scare the heck out of you.
If you’re in the market to buy a home and need to apply for a home loan, there are 25 tips I can give you, so you won’t be making any uneducated decisions.
1. Shop around for a mortgage first and ask the attending loan officers to pre-qualify you and tell you what your home purchase budget is before you start looking at homes you cannot afford.
2. Apply for a mortgage with at least three lenders before you select a loan.
3. Once you have filled out all the forms and given them your proof of income and the fixed monthly cost you have such as car payments, credit card payments, other loans, and other fixed payments you have to make, the lender can pre-qualify you based on that information. Usually lenders in Costa Rica will allow for 30 percent of your net income to be used for mortgage payments. If you give the lender incorrect information it will show when you formally apply, so give them the correct information up front.
4. There are no mortgage companies (yet) in Costa Rica. Mortgages are extended by banks or private lenders.
5. Few banks in Costa Rica extend mortgages to non-residents. Private mortgages are available anywhere between 12 – 18 percent interest rate annually in dollars. Some developers offer owner financing. Banks offer different mortgage packages, depending on the borrower.
6. You want to request each of the three lenders to spell their package out for you and preferably every detail of it, so you understand what they are charging you for comparison. The details need to include all the costs that I refer to below.
7. If you are an employee, your employer can give you the necessary proof of income. If you are an entrepreneur, the bank will request a CPA (Certified Public Accountant) to certify your income. If you’re a US citizen, the bank will accept an up to date credit report and your last three income tax forms. The CPA will cost anywhere between $150 and $300, shop around for the best price.
8. A loan application with a bank can take up to three months to get approved while a private lender can do it within 30 days.
9. Once you have committed to the loan and found a property, the lender will send an appraiser (to be paid for by you) to see if the property that is offered as collateral covers the debt in case of foreclosure. The cost of this appraiser usually runs between $500 and $1,000 and in some cases includes a home inspection by the same appraiser. In this case, the inspector usually only reviews the electrical system and looks to see if there are termites.
10. I recommend you also hire a home inspector yourself, so the home will be thoroughly inspected before the closing. Even new homes always have toilets that don’t flush well, drains that don’t drain, windows that don’t close and so on. By having a home inspector report on the problems, there is time before closing to get everything fixed before you move in. A good home inspection might cost anywhere between $300 and $1,000 depending on the size of the home and the type of report requested.
11. Banks will normally allow for no more than 70-80 percent LTV (Loan To Value). That means they will lend 70-80 percent of the appraised value. Private lenders will generally allow for no more than 50 percent LTV. You will have to pay the 20-30 percent difference out of your savings at closing.
12. It is VERY important to find out what the term of the loan is. This can be 10 years, 15 years, 20 years, 25 years or 30 years, depending on the lender and the age of the borrower. Private lenders usually go by the year and renew the loan if needed. The longer you spread out the loan, the easier the payments will be on you, but the more interest you will be paying. Ask your loan officer to calculate the different options for you.
13. All lenders will charge you an administration fee for taking care of your application, which is usually around 1.5 percent of the loan, but it depends on the package the lender is offering you.
14. Most banks will need an option to purchase – sale agreement or a letter of intent between you and the seller. This legal document could be supplied by the seller’s attorney or your own. If the developer supplies it, NEVER sign it before you have your own legal representative review it. This document usually costs between $250 and $500, but I’ve seen some attorneys charge over $1,000 and some even charge a percentage of the sale. Shop around for a good price.
15. In order to make the package interesting to the borrowers, most lenders will give you a fixed rate for the first two years and then adjust it on a yearly basis. Mortgage interest rates are usually based on Prime Rate plus x percent (see: http://homeguides.sfgate.com/prime-rate-mean-8925.html). The x percent is what will get adjusted whenever the lender feels like it and the prime rate changes all the time. Be aware that banks, to attract customers, will offer certain promotions that will make it difficult for you to compare one loan offer to another, much like what supermarkets do with their promotions.
16. Most lenders will have you take a medical exam, depending on your age, which always has a cost you need to include in your payments.
17. Most lenders will oblige you to take out a life insurance policy. Banks usually have group insurance, so you will be part of a group of home buyers, which will make the monthly fee a lot lower than if you had your own life insurance. Some lenders will allow you to keep a life insurance policy you already have, but will request proof of the annual policy payment. This life insurance, while expensive, makes a lot of sense because if the borrower passes away, the insurance company will pay off the mortgage in full and the property will be free and clear for the surviving family members.
18. All lenders will oblige you to take a fire and earthquake insurance, which should cover the value of the construction, not the value of the land.
19. The closing cost is usually 3 percent of the sales price; this includes the attorney fees and real estate transfer taxes. Some developers have the property owned by a pre-constituted corporation so the shares and powers of attorney can be transferred for a lower cost. Ask the seller as well as the mortgage officer for a specified cost calculation as these costs can add up tremendously.
20. If you purchase your home without a loan, you have the right of a closing attorney. Never use a developer’s attorney for closing: find your own. If you are buying with a mortgage, the lender or bank will insist on using their attorney.
21. Banks love to offer you all the above costs to be included in your mortgage, so they can charge you interest during the loan term. This is great business for the bank, but not for you, the buyer.
22. A new home deserves new appliances, you think. Buy them with cash and do not put them on your credit card because you might be surprised that the bank will immediately re-qualify you since this changes the balance of your credit card debt.
23. Before you go to closing, check with your loan officer to make sure that the loan terms are the same as they were when they were offered to you when you applied for the loan.
24. Though the condo or HOA fees are not part of your loan, they will be a monthly payment to be made as soon as you have bought your new home and most buyers tend to forget to include them in their monthly spending budget. If you are buying in a new condo development, the HOA fees usually go up 20 – 30 percent after the developer has sold more than 50 percent of the project.
25. Real estate commissions, in case you used a real estate agent, is always paid for by the seller, so this is a FREE service to you as a buyer.
So, let me sum up for you what you have to pay before closing: 20-30 percent down payment, CPA, appraisal fee, home inspection fee, medical exam.
At closing, you will have to pay: 1.5 percent admin fee, 3 percent closing cost, life insurance, fire insurance
After closing: condo or HOA fee.
If you know how to work with an Excel spreadsheet, I recommend you put together a spreadsheet to compare the different packages used by the different lenders to get a clear overview of all the payments that need to be made.
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Ivo Henfling, a Dutch expat who has lived in Costa Rica since 1980, founded the American-European Real Estate Group back in 1999 which was the first functioning MLS with affiliate agents from coast to coast. You can contact Ivo at 506-8834-4515 or email ivo@american-european.net
