It’s illegal for banks that aren’t domiciled in Costa Rica to advertise their services – illegal to advertise, but not illegal to provide those services. As the rest of the world has caught wind of the real estate boom in Costa Rica, some foreign banks have begun sniffing around, looking to offer mortgages in Costa Rica under the radar. It’s totally legal, and the terms they offer are competitive with what you would find in the United States. So how do you find one of these loans?

A good place to start might be Stewart Title. In the past, Stewart Title has had partnerships with lenders abroad, though one in particular – an agreement with Lehmann Brothers – ended when that bank became one of the largest casualties of the subprime mortgage crisis. Still, the interest from foreign banks remains, and Stewart Title maintains that it provides the service of connecting lenders with borrowers. It does not collect a commission, though you may have to be a Stewart Title customer in order to take advantage of the service.

Other places to find leads on foreign bank financing include your real estate broker, your lawyer, or the developer selling you the property. Failing that, it never hurts to ask your local bank in your home town. Though they may not have a specific program, they may still be open to the idea.

Once you find a bank willing to offer a loan for the purchase of a property abroad, the application process will be identical to a normal application process in the U.S. or Canada. Your social security number will get you a credit check, your score will be checked against your assets and income, and you’ll either be approved or denied. In the past, some people have purchased their second home in Costa Rica with help from a home equity loan, though given the current financial climate, that may be difficult at the moment.

Hard loans and short-term loans

Bank credit used to be scarce for everyone in Costa Rica, which is why many people desperately in need of financing turned to private lenders – so-called “hard loans” granted from individual to individual. This kind of loan is as described: hard. The annual interest rate is very high and collateral – that is, your property – is usually put into a trust (in Spanish, a fidecomiso). A missed payment means the lender can take immediate possession of the collateral.

You may find yourself in a tight situation and need to find a hard loan, or you may have a deal that’s too good to pass up, you just need some cash flow. The hard lenders are out there, and your broker or lawyer will likely be able to connect you with one (or lend you the hard money themselves). Whatever you do, be sure to proceed with extreme caution, don’t take a hard loan you can’t pay back, and make sure your lawyer goes over the hard loan documents.

There’s a chance you might accept similarly outside-the-bank financing from the person selling you the property. Often this is a developer or investor with decent cash flow who can afford to “loan” you the cost of the property that you don’t have in your pocket just at that moment. Usually these are short-term arrangements (from a few weeks to a year), so the interest rate is high and the penalty for missing a payment is steep. Different from a third-party hard loan, however, one can assume that the seller would rather have cash than the property, so perhaps this kind of short-term financing isn’t quite as “hard” as it could be.

Using your IRA to purchase property

There’s one last financial option that you might have if you’re nearing retirement and hold a substantial amount of your retirement savings in an IRA: You can use those funds to buy your future retirement home. Don’t worry, it’s legal. Technically, money held in an IRA is invested in stocks, bonds, money markets, mutual funds, and yes, it can even be invested in real estate. There are, however, a few catches. For one thing, it has to be an investment, meaning you can’t just buy a home with your IRA money and move into it. The IRS also places restrictions on renting or loaning the property to family members.

Renting the property to strangers, however, is perfectly allowable and actually the point. Rental income earned with your future retirement home gets rolled – tax free – back into your IRA, and your nest egg grows. Once your ready to retire, the IRA turns the property over to you for your residency as a distribution.

The caveat is that things are a little more complicated than they sound. For one thing, a typical IRA can’t really do this. The bank administering the IRA will only sell you their own products, and 1.5 acre plots of land in Guanacaste aren’t likely to be among them. You’ll probably have to hire an independent fund manager to create something called a self-directed IRA, then roll the funds from your current IRA into the new one. Also, be sure you don’t need that money to live on in the short term. It is your retirement money, and unless you can replace it (by, for example, selling your current home) you might want to think twice.

Escrow, fees, exchange rates, and trusts

Finally, there are a few other strange creatures of the Costa Rican financial landscape that you should know about. Escrow is one of them. Escrow is not very regulated in Costa Rica. That is to say, it’s regulated by SUGEF, but mostly to prevent money laundering, not to protect customers. Still, escrow accounts must be registered, and you should be sure that your escrow agent has such an account. Escrow agents are often also the lawyer of one side of a transaction, though it’s a better idea to find an independent escrow agent.

Another strange thing that you won’t find anywhere else is the use of fidecomisos, or trusts, as a way of securing property as collateral against default. This method of granting loans came about due to the difficulty of collecting collateral once a borrower defaults. In financing using a trust, the property is held in the trust, and if the borrower misses a certain number of payments, it immediately becomes the property of the lender. Usually loans secured by placing a property in trust are short-term loans. Be careful with them, because you can lose your property very quickly.

Doing a business transaction in a foreign country may mean you’ll have to deal with exchange rates. Most likely the seller will quote you a price in dollars, and if you have cash, there are no worries. Likewise, if you have a mortgage in dollars and your primary source of income is in dollars, you have no exchange risk. If, however, you somehow end up with a loan in colones and your income in dollars (or vise versa) you’ll be exposed to a significant amount of risk. In this situation, it’s better to take out a loan that’s half in dollars and half in colones. In the event of any exchange rate fluctuation, the two sides will cancel each other out. If you want to check the dollar/colon exchange rate, visit www.bccr.fi.cr, the Central Bank’s Web site. The exchange rate found on the homepage is an average of rates offered by banks the previous day.

Finally, there is the issue of fees. It depends on the bank and the circumstances, but Costa Rican banks generally charge a few thousand dollars in fees for their loans. Depending on the assessed value of the property you’re buying, sometimes the bank can add these fees to what you owe rather than collecting them at the signing.