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Hard Money Loans Costa Rica
So many questions I get on Facebook and other social media are about hard money loans in Costa Rica; many people need help understanding what they are. They want to determine if a hard money loan could suit their needs and, if so, where to find one. Others don’t understand or confuse the value of these loans, which can lead people to think, “I would never use a hard money lender because they’re too expensive.” So let’s step back and discuss what hard money lenders are.
Hard money lenders are very different from your traditional big banking options; for any of you who have ever gotten a loan from a big bank, you know what a daunting task it can be to go through the process successfully. They usually want you to provide at least two years of tax returns from the same job you’re currently holding, a substantial down payment, to fill out a ton of their paperwork, and probably even an appraisal you must pay for. It can typically take a few months to a year or even longer to close once you have submitted all the necessary documents. You will probably have a 30-year loan at a decent interest rate. Back in the day, mortgage terms were at 15-20 years, and now they are at 30 years, but the way things are going, soon they will be at 40-50 years and multigenerational. But this isn’t the whole story; there is more to mortgage options.
There are several reasons why the big banks seem to need fixing when building or renovating a business, BnB, hotel, or anything else that calls for speedy action. For many property sellers giving a good deal could be because they need the money fast, and waiting for someone to get a bank loan can be too slow of a process and kill the deal. They may not have the luxury of being able to wait months or longer to close; they would rather sell their property to someone with cash and complete the sale in a week or two. Banks could limit you by saying you’ve got too many things going on, too much debt, and we cannot approve you. Imagine if you find a spectacular deal of a lifetime, such as 50% off, but they will still not support you. Therefore, big banks can be challenging for anything time-sensitive.
So, where does that leave us?
Somebody must be willing to fill this gap and finance someone with the know-how and expertise to do the job. This is where the hard money lenders step in, and this is how many people have changed their career paths for the better. Private lenders are ready to finance deals that the banks won’t or can’t because they aren’t betting on the person’s credit score. The loan is based on collateral from the client’s property’s value or equity. They know that if you have enough equity, it will be a safe loan for them because they understand they can get their money back through foreclosure if necessary. Many lenders make this their sole job and lend money for a living. A huge benefit of using a private lender is that they generally don’t need all the strict underwriting that the big banks need. They can make their own decisions without the bureaucracy, so many private loans can fund a deal in 7 to 14 days, precisely what borrowers are looking for.
Once you realize you can work without using the big banks, private lenders could be your game-changer. Hard money lenders generally won’t judge you based on your credit score or debt-to-income levels. It’s not you as a person that needs to impress a private lender; the equity you bring from your property can be enough to get the job done. Great opportunities happen daily; there’s no need to miss one when you can secure the loan you need to capitalize. Hard money lenders can be great for business ventures as they can close quickly after they’ve evaluated the deal. Loan terms are typically done at 12 to 36 months and may have an early repayment clause to justify lending money at looser terms. This is to protect themselves from the borrowers turning around and paying off the loan early before they can earn much interest.
Let’s talk about the price of a hard money lender. When you make a mortgage payment from a bank loan, a portion of that payment will go toward your principal, which could make it more expensive per month. Hard money lenders in Costa Rica usually charge you anywhere from 12 to 16% interest plus closing fees, similar to the banks here. This is made up of the consulting and lawyers fees, which can vary, so if you get a loan, there’s a one-time closing fee that can be factored into the amount you borrow, so you avoid the need for the capital upfront to get the loan.
On a $100,000 USD loan, you will be paying the interest via monthly payments of 12% to 16%, so you’d be paying anywhere from $1,200 USD to $1,600 USD, which could be considered a lot of money to some. This can be why people get turned off by the idea of a hard money loan. Another way to look at it is from the reverse perspective, where even if you begin a contract with higher rates, you can still profit after deducting all your expenses. Over time you can build up your business and equity, getting you better deals to make even more profit. You can tell yourself: “I’m still going to make my $20,000 – $25,000 USD even after paying these guys; what do I care that it’s expensive?” I’ve always said: “I’d rather pay for an “expensive loan,” than not do a deal at all.” A 50% of something will always be better than 100% of nothing. Sometimes it’s best to get over the fact that you need a hard money loan because it’s your only way to get that lifetime deal. There can be a light at the end of the tunnel, which comes at cheaper terms. Once you’ve earned the experience and an excellent reputation and are starting to pick up the volume, lenders may recognize your tenacity. Hence, they know they may not make a lot on one deal, but if they get my following ten contracts, they’ll make even better money in the long run. You must earn your stripes in any business venture you may find yourself on. You must pay to play; whether it’s with the hard money lenders, paying for a mentor, or just finding somebody to jive with, you need to get your feet wet and do whatever it takes to become successful.
Naturally, the next step is, where do you find these hard money lenders? You may scan the web, as you could find some through Google searches and advertisements, or you could go with Gap Equity Loans, which has a proven track record with many previously completed loans, such as the central valley and the beach loans.
The primary “holy grail” factor in obtaining a successful loan is the loan-to-value ratio, the acronym being “LTV.” Gap Equity Loans has recommended private lenders looking to lend from anywhere up to 45% of the loan-to-value ratio. At a 45% LTV, with, let’s say, a property that has a value of $100,000 USD, they’re recommended private lenders are only going to be willing to give you about a $45,000 USD loan at the maximum, excluding the closing costs which can be factored into the loan itself. This is the private lenders’ guarantee that you’ll have enough equity in the deal to be safe to lend to. Therefore the requirements of private lenders are much more lenient than national banks.
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What exactly is a private mortgage?
A private mortgage is a loan provided by a private lender rather than a typical bank. Private lenders may have less criteria and offer greater freedom than banks.
Who is eligible to apply for a private mortgage in Costa Rica?
Anybody, even foreigners, can apply for a private mortgage in Costa Rica if they have property to serve as security.
What are the advantages of obtaining a private mortgage?
Private mortgages can include simpler qualification standards, speedier funding, and more flexible loan terms. They can also be an excellent choice for people who have bad credit or a changing income.
How much can I borrow in Costa Rica with a private mortgage?
Private lenders often lend up to 45% of the property’s value.
What are the private mortgage interest rates in Costa Rica?
Private mortgage interest rates can be greater than those given by regular banks, reaching 18% with a high loan-to-value (LTV) ratio.
How long does it take to repay a private mortgage in Costa Rica?
A private mortgage often has a payback duration of 1 to 3 years, which is shorter than the standard 30-year repayment period for regular mortgages.
What is the procedure for applying for a private mortgage?
Because you are using your property as collateral, the application process for a private mortgage can vary depending on the lender. However, because you are using your property as collateral, it generally involves filling out an application form and providing proof of income and possibly your credit history. Private lenders may be subject to less restrictions than regular banks.
How long does it take to have a private mortgage authorized in Costa Rica?
Private mortgages may typically be authorized in as little as 10 days, far faster than regular bank loans.
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Article by Glenn Tellier (Founder of CRIE and Grupo Gap)
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