|
The 5 Steps of the Loan Process
Step 1: Finding out how much you can borrow
The first step in obtaining a loan is to determine how much money you can borrow. In the case of buying a home, you should determine how much home you can afford even before you begin looking. By answering a few simple questions, we will calculate your buying power, based on standard lender guidelines.
You may also elect to get pre-approved for a loan which requires verification of your income, credit, assets and liabilities. It is recommended that you get pre-approved before you start looking for your new house so you can:
- Look for properties within your range.
- Be in a better position when negotiating with the seller (he/she will take you more seriously knowing your loan is already pre-approved).
- Close your loan quickly as it will already have been pre-approved.
Here in Costa Rica, due to segregation and titling of the property often coming after a home is being built or already has been built, we feel it VERY important to get pre-approved from a bank/lender before you give a down payment or decide on buying a home. The process is easy and you can receive a bank/lender pre-approval letter to give to the seller/developer upon arranging to buy a property. Please contact us for more details.
Loan to Value and Debt to Income Ratios
Loan to value or LTV ratio is the maximum amount of exposure that a lender is willing to accept in financing your purchase. Lenders are usually prepared to lend a higher percentage of the value to credit-worthy borrowers. Another consideration in approving the maximum amount of loan for a particular borrower is the ratio of monthly debt payments (such as auto and personal loans) to income. The rule of thumb states generally that your monthly mortgage payments should not exceed 1/3 of your gross monthly income. For loan purposes in Costa Rica, this amount generally must not exceed 25% NET (some exceptions can be made up to 30%). Overall with Costa Rican banks you can have a combined loan DTI up to 40-50% NET (depending upon the lender). Therefore, borrowers with high debt to income or DTI ratios need to pay a higher down payment in order to qualify for a lower LTV ratio. Most Costa Rican lender use a Net income figure not a Gross income figure to calculate debt ratios.
How do I calculate my DTI Ratio?
It is very simple. Let's say that someone makes $10,000/month gross and after taxes $8,000 net. We first need to add up the monthly debts that are listed on the credit report only (mortgages, car loans and credit cards). So let's also say that they have a car payment for $400/month and a mortgage in USA for $1000/month. $1400 all together. That would mean they currently have a DTI Ratio of 17.5% net (1400 divided by 8000). If we add a mortgage payment here in Costa Rica to this debt load, the DTI Ratio would be calculated as follows. They want to buy a home and the lending amount if 100,000. At 8.5%, for 25 years, the payment would be around $850/month including taxes and insurance. $850 + $1400 = $2250. Divide $2250 by 8000 and your total DTI Ratio would be 28.125%. This person would qualify!!!
FICO Credit Score
FICO Credit Scores are widely used by almost all types of lenders in their loan decisions. It is a quantified measure of the credit-worthiness of an individual, which is derived from mathematical models developed by Fair Isaac and Company in San Rafael, California. FICO scores reflect the credit risk of an individual in comparison with that of the general population. It is based on a number of factors including past payment history, total amount of borrowing, length of credit history, search for new credit, and type of credit established. For loan financing in Costa Rica, scores generally must be over 680. Even better are scores that are over 700.
Self Employed Borrowers & No Income Verification Loans
Self-employed individuals often find that there are greater hurdles to borrowing for them than an employed person. For many conventional lenders the problem with lending to the self-employed is documenting an applicant's income. Applicants with jobs can provide lenders with pay stubs, and lenders can verify the information through their employer. In the absence of such verifiable employment records, lenders rely on income tax returns, which they typically require for the past 2 years. As well, Corporate/Partnership tax returns with all schedules attached for the prior 2 years signed and dated, a Profit and Loss statement for year to date signed and dated, and Balance Sheet for year to date signed and dated are required.
Source of Down Payment
Lenders expect borrowers to come up with sufficient cash for the down payment and other fees payable by the borrower at the time of funding the loan. It is generally expected that these funds come from the borrower's own savings, although a borrower may sometimes receive non-returnable gifts towards the down payment and other loan fees. Costa Rican banks generally do not lend over 80% of the LTV. Normally though, the borrower must have at least 20% down, plus an additional 4.25-7.5% for closing costs.
Step 2: Selecting the Right Loan Program
Currently, loan programs in Costa Rica are expanding due to growth in the local mortgage industry here. We are working hard with lenders to provide more competitive and attractive products and we currently offer a couple of different programs that work within the guidelines and investments goals of the local banks and private investors. We believe that we currently have the most options available for anyone looking to buy property here in Costa Rica because we have multiple sources of lenders and many leverageable contacts in the industry. We strive to provide all the basic options that one can find in the USA and are constantly adding options while searching and working for new ones.
Step 3: Apply for a Loan
Please follow the “Apply Online” link listed above to begin the application process.
Or better yet, please call us at 1-800-518-2066 and we can walk you through the process.
Our application fee is $299. This fee covers pulling a credit report, paying for office expenses, and all other work involved in the application process. If you are a Canadian client, the fee for one borrower is $334 and for 2 borrowers is $369, due to the cost of Canadian credit reports.
Loans in Costa Rica are normally more labor intensive than loans in the USA. This fee also insures due diligence on behalf of the broker and the client.
The application fee can be paid to MDOMS in 3 different ways.
- On our homepage there is a button on the bottom that says “application fee”. Clicking on this button will take you to a secured Paypal portal where your credit card can be processed. In the event the credit card processor is not working, please see the other 2 methods below.
- You can send a bank wire. We can provide these instructions upon request. Wire transfers for our bank in Costa Rica are routed through Citibank in the USA . Please make sure the amount of the transfer is not taken away from the total application fee.
- We also accept Western Union or Moneygram. We can provide these instructions upon request . For Western Union , a 10 digit conformation number is given. For Moneygram an 8 digit number is given. We must have these numbers to pick up the money.
Step 4: Begin Loan Processing – Gather Documents Needed
Loan approval guidelines vary depending on the lender and of course the client's situation. In general, approval is based on two factors: your ability and willingness to repay the loan and the value of the property.
Once your loan application and fee have been received we will start the loan approval process immediately. Your Mortgage Consultant will verify all of the information you have provided. If any discrepancies are found, either our processor or your Mortgage Consultant will troubleshoot to verify the information and to make sure we have everything we need.
What factors are normally analyzed during processing?
Below is all the information that is necessary to send a loan to underwriting: Numbers 1-11 are needed to start the loan process, and 11-18 procedures that take place after the loan process has been started that we also coordinate. We will coordinate the entire process and all parties involved!
Please be advised that computer screen printouts normally do not suffice as statements and that our preferred method of delivery for all of these documents is scanned in .pdf format , emailed to us. Also, all of the paperwork should be sent in 1 to 3 larger scanned files. We will not accept files that have individually scanned documents to us, as this is very time consuming to organize. If you don't have access to an industrial scanner, places such as Kinkos, Office Depot and Office Max provide such services. Once documents are scanned they are burnt onto a CD and the file(s) can be sent to us through email after that point. Please call beforehand to know how much they charge for this service.
Documents can also be faxed to us at 011-506-215-3745. We don't recommend faxes due to the information not being 100% clear all the time. In that event they are faxed and aren't clear, they may need to be refaxed. Please call us to receive confirmation of the documents.
Also, if you wish to protect your private information, please take steps to remove important numbers before sending us those documents . We will not white out private information; this is the responsibility of the client.
It is very important to follow the directions in this guide so as to not slow down the approval and closing process. Providing the documentation in this manner serves to expedite the entire process!
Documentation Required:
1. Purchase agreement (or earnest money contract as referred to here). If you are refinancing, this document is not required. A copy of the proof of funds in escrow is required also.
2. Copy of passport (a copy of all pages of the passport will be necessary to formalize your loan with the bank as this is a Costa Rican banking regulation, even if the majority of the pages are blank).
3. Loan application complete and signed – please initial the application on all pages, and sign on the 1 st page if there is a borrower and co-borrower, and sign on pages 4 and 5. We have included a borrower's authorization as well, which needs to be signed.
4. W-2s for the past 2 years (wage earner only)
5. All pages of the last 6 months to date of personal bank statements (in some cases 12 months). If you are a business owner, please provide a copy of business bank statements and personal bank statements. Please also provide a copy of asset account statements for 6 months as well.
6. 1 months worth of pay stub copies (wage earner only)
7. If self employed, a letter from a CPA verifying the last 12 months gross and net income will be required. This letter must be signed by a CPA on company letterhead. A CPA letter is normally written after analyzing the total income one earns. Mostly, CPA's in Costa Rica use the deposits into ones personal bank account as proof of income. So, all deposits are totaled together from deposits made and a gross figure is obtained. From there, expenses are removed to arrive at a net income figure for the year. Knowing that many of our clients have income from multiple sources and multiple accounts, if deposits from more than one account is used, please provide 3 months bank statements from any account used to calculate income. A CPA from where you are from can be utilized.
8. If regular employed, a letter from employer stating time with company, salary and position on official letterhead signed, will be required. An example of a company letter is included in the information sent to you.
9. 2 years tax returns – All pages
If self employed or commissions earned by borrower exceed 25% of the gross income, we will also need the information below. If you do not have this information, it is ok, just make sure the CPA letter is complete year to date.
a. Corporate/Partnership tax returns with all schedules attached for prior 2 years
b. Profit and Loss Statement for year to date (signed and dated)
c. Balance sheet for year to date (signed and dated)
10. Know your customer form and SUGEF form. These are both forms that are required by Costa Rican law. The SUGEF form is in Spanish, and must be signed only. The know your customer forn must be filled out completely, signed, dated and the originals (not copies) must be given to the bank.
11. Company Questionnaire (for self employed only)
Note: If there is any other documentation you have that would be helpful in speeding the loan process along, please supply that information. Such information may include documentation on a documented proof of alternative sources of income including award letters for pension and/or Social Security, rental income/agreements, etc…
After the loan process has begun, here are some of the other procedures that are required in order to finish your loan application of which we will coordinate :
12. Appraisal – We arrange the appraisal on behalf of the client.
13. Title Work – We can arrange this for our clients. Client has to provide 20% as a down payment towards the full cost of the title guarantee until the loan closes. Title policies generally run at 0.7%-1.0% of the value of the loan. For example, if the policy is 1% and the financing is for 300,000, the customer will have to provide $600 to begin the title guaranty process.
14. Life Insurance – Most (not all) Costa Rican lenders require that a life insurance policy equal to the value of the loan be present before the loan can close. So if you are closing a loan for 100,000, you will need a life insurance policy collateralized to the bank for 100,000. If you currently have a policy from your country of origin, that policy can be used if it is equal to or over the amount of requested financing. The lender would have to be made beneficiary through a collateral assignment of said amount, which would be verified before funding. A formal letter must be sent to the bank from the insurance provider stating that the bank is the beneficiary of such loan amount. In the case that you do not have a life insurance policy, you must request a policy from a provider in your home country or here in Costa Rica through the bank. Sometimes this involves having a medical appointment, and the policy must be underwritten as well. If this is required, we suggest it be expedited immediately as delaying this step in the process can delay the loan from closing. If you have a group policy, most of the time this type of policy is not valid. With many group policies provided by employers, if employment is terminated, the life policy benefits cease. Also, the bank will need a full policy, not just one covering accidental death, but death in case of sickness and other things as well.
We can help you fill out the collateralization form from your insurance provider.
15. Home or Hazard Insurance – Home or Hazard insurance must be placed on the home as a requirement by the lender. The bank automatically will include this into your payment. The price of a Hazard policy is normally around 0.0026% of the property value a year. For example, if your house is worth 100,000, the policy cost per year would be around $260.
16. Certification of Municipal taxes and land (up to date). This will be provided by the developer or homeowner. Property taxes run about 0.0025% of the value of the property. .For example, if your house is worth 100,000, the property tax per year would be around $250.
17. Copy of Cadastral Plan (survey plan) – We can arrange for this to be taken care of, which is provided by developer or homeowner.
18. Closing – Those applying for mortgage financing must be present to sign loan documents once the mortgage has been completed approved, closed and formalized.
Income/Employment Check
Is your income sufficient to cover monthly payments? Industry guidelines are used to evaluate your income and your debts. For clients that are self employed, often times actual income cannot be proven via tax returns. When this happens, an alternative to tax returns is to evaluate business and/or personal bank statements of deposited income for up to 12 months to calculate Debt-to-Income Ratios and your ability to repay the loan.
Credit Check
What is your ability to repay debts when due? Your credit report is reviewed to determine the types and terms of your previous loans. Any lapses or delays in payment are considered and sometimes must be explained.
Asset Evaluation
Do you have the funds necessary to make the down payment and pay closing costs? Remember that in most cases, if you do not have sufficient funds for at least 20% down and closing costs, we will not be able to proceed further.
Property Appraisal
Is there sufficient value in the property? The property is appraised to evaluate physical condition, location and zoning, thereby providing all parties involved with a value of the property.
Other Documentation
In some cases, additional documentation might be required before making a final determination regarding your loan approval.
In order to improve your chances of getting a loan approval:
- Fill out the loan application completely. Use our online forms to expedite this process if you like or better yet, call us and we'll walk you through the process!
- Respond promptly to any requests for additional documentation especially if your rate is locked or if your loan is expected to close by a certain date.
- Do not move money into or from your bank accounts without a paper trail. If you are receiving money from friends, family or relatives, please prepare a gift letter and contact us.
- Do not make any major purchases until your loan is closed. Purchases cause your debts to increase and might have an adverse affect on your current application.
Completed File is Submitted to Lender
- Your application, disclosures, credit report, bank and asset statements and escrow instructions are submitted to the lender once we have received these and any other required documentation as well as the application fee. Normally turn around time for conditional underwriting approval in Costa Rica is 3-7 days. We are also working to improve this so that it is no more than 3 days. At this point, a loan is either fully approved or approved with further “conditions” to be met. 99% of the time the loan will have more conditions (for example, most files don't go to banks with an appraisal, so the appraisal would be a condition to clear before the loan closes). This may require more documentation from the client and/or other parties involved. Once these required conditions have all been satisfied, the loan is approved and goes to closing.
It must be noted that different banks require different documentation. The above list is an exhaustive list of documents we would need to submit your loan to any one of those banks. All of this documentation however may not be necessary. And although it is a lot of information, it also saves us from having to get further information from you in the future throughout the process. We like to get everything up front and be as complete as possible from the get go. Please gather and submit all of this documentation as soon as possible, as receiving and re-receiving documents delays processing.
It must be noted that if we do not have all the necessary paperwork the loan cannot be submitted for approval. It is imperative that the information is complete, legible, and provided in a timely fashion.
There are 2 general ways we can receive your loan documents.
- The easiest way for us to receive your loan documents is if you scan and send them through an email attachment. If you do not have a scanner, you can go to a local Kinkos or Office Depot and your documents can be quickly scanned and converted into Adobe .pdf files. Then they can either send you the documents to your email address (make sure the file is not rejected for being too big, if you have hotmail, attachments can be received up to 10 MB) or they can burn the information onto a blank CD. This is a cheaper option as well, due to the cost of international faxes.
- You can fax the information to us here in the office. Our fax number is 011 (506)-215-3745. You must dial an international connection number first (011). Sometimes due to the nature of the fax machine that is used to send the information, it can come across blurry or faded. This happens especially with passport photos. So please verify with us that the fax has been received and that all the documents are legible.
Step 5: Close Your Loan!!!
After your loan is approved and cleared to close, you are ready to sign the final loan documents. You must review the documents prior to signing and make sure that the interest rate and loan terms are what you were promised. Also, verify that all information on the loan documents is accurate. The signing in Costa Rica takes place in front of a notary public/lawyer.
There are also several fees associated with obtaining a mortgage and transferring property ownership which you will be expected to pay at closing. Bring a cashier's check for the down payment and closing costs if required. Personal checks are normally not accepted. You also will need to show your homeowner's insurance policy, and any other requirements such as flood insurance, plus proof of payment. But this documentation will be collected before the loan actually closes and is ready to be signed.
|
