There are many reasons why you could have your loan declined by our risk analysts…
Mortgage on Undeveloped Land
At Gap Equity Loans, our lenders generally do not like mortgage loans on undeveloped land in Costa Rica without significant construction on site. There are some exceptions to this rule but they are few and far between. Why is this? If you’re not building, lenders see it as a “speculative investment” and may not approve your home loan.
As a result, the approval process can be more cumbersome than standard home loans.
Land Generates Expenses, Not Income
Land is a “money pit” — it does not earn any money, in fact, it needs money to stay afloat, in terms of taxes and maintenance. Compare to a house for instance, that can earn money as a rental before you sell it.
Also, land generally requires a substantial initial investment (in the form of construction) to turn it into an income generator. Lenders who take back a piece of land due to a foreclosure are left with few options: either sell the land quickly, or invest a substantial sum to develop it.
Land is Speculative
Here is the issue with land: It’s a 100% speculative investment. Land investors are 100% hoping the value will go up to provide them a fair rate of return. Lenders are not generally speculative with loan collateral.
There’s Plenty of Land in Costa Rica
While there is a theoretical limit to how much land there is in the globe, Costa Rica, by extension, has a lot of it. When trying to sell land in a buyer’s market, you’re up against a large inventory of lots that are also for sale.
This is why lenders do not value land as highly as a house, for instance. In the event of a foreclosure, raw land can be much more difficult to sell at market prices. A lender is looking to recoup their investment as quickly as possible if the borrower cannot pay back the loan.
Who Might Consider Costa Rica Land as an Investment?
Land may be a suitable investment for house builders and long-term corporate land investors that have substantial development experience and have well-diversified land holdings to decrease overall risk. Also, if you discover a great price on a residential property on which to build your dream house and are prepared to take a chance, it may be a rewarding investment.
But for the regular investor, buying land implies more risk than reward. This is why lenders prefer to lend on properties with residences or construction of commercial value.
By the way, did you know that if you spend $200,000 or more on a home in Costa Rica, you may be eligible for Costa Rica residency? CLICK HERE FOR MORE INFORMATION