Purchasing a property in Mexico is an exciting decision, and with the growing and increasingly successful cross-border mortgage industry that has been developing in Mexico over the past few years, there are now more options than ever to finance your home!
Mexico has historically been a cash-based economy, but with the influx of investment by foreigners, financing has become a viable alternative. Many US lenders and banks have turned to the Mexican market, and their previous US experience makes the process more familiar than if one were to finance directly through a Mexican bank.
For some people, the introduction of financing into the Mexican real estate market represents the opportunity to pursue a dream that may not have otherwise been tangible. For others, obtaining cash to purchase a property may never have been an issue, and so the question becomes, “Why finance?”
There are several important reasons why cross-border financing in Mexico makes sense:
- Keep national and foreign investments separate. Some people may decide to pull equity out of their properties in the US or Canada to finance their Mexican purchase. This is an option, but it also ties all of your investments to one source. It is smarter to keep your national and foreign investments separate because if something were to go awry in either location, the investments in the other location would be safeguarded. This also prevents tying up equity that could be used for college, emergencies or retirement funds and keeps your equity intact. Your equity in your home country (which is many people's biggest asset) is a source of quick money if you would need it in the future.
- Leverage. In other words, use the other guy’s money! Right now, in many locations, annual property appreciation is around 15%. If you have $450,000, you could use all of it to pay cash for a $450,000 property and gain around $67,500 in annual appreciation. Not bad. But why not pay only $150,000 cash for a down payment on a $500,000 property and finance the rest? Now, not only have you used less money to purchase a property of higher value, but your annual rate of return appreciation is higher, and you have $300,000 remaining in cash reserves!
- Future investment opportunities. Anyone who has visited Mexico has witnessed the incredible opportunities for real estate investment. By using the concept of leverage to your advantage, you better utilize your cash, which allows you to pursue additional investment opportunities. From the example above, you can purchase a $500,000 property by paying only $150,000 cash and financing the rest – this leaves you with $300,000 to invest in additional properties that you can either rent out or flip for a profit. With financing, your money goes much further and can even generate additional income!
- Extra level of protection that title is free and clear of encumbrances. By having a lender involved, the transaction won’t close until the title is absolutely perfect. In most cases, the lender has the greatest risk in the property (up to 75% loan, vs. your 25% downpayment). They are totally comfortable with the Notario bringing the title up to date and free of liens. Title insurance is not required by most lenders but is optional for the buyer to purchase if they so choose.
- If you pay cash, it is expensive to pull out cash out from your Mexico equity in the future. It is very easy and relatively inexpensive to pull out equity from property located in the US or Canada. This sometimes is how property is purchased with “cash” in Mexico. Once cash is invested into a property in Mexico, it is difficult and expensive to pull it out later. The maximum cash-out is only 50% of current value, so you still have to leave 50% equity in the property. In addition to paying the loan fees, you have to pay the Mexico taxes and fees a second time, in addition to cancelling your existing fideicomiso/bank trust and creating a new one. Contact Doug Jones (918-398-9588 Canada/US) for a detailed cost breakdown. My recommendation is to get your best loan option available at time of purchase, rather than pay cash and pull out cash later.
- Interest rates are at an all-time low in Mexico. Interest rates ARE deductible on your US taxes. Rates are higher than the US or Canada because of risk factors such as these loans being for a second/vacation home, loans are being made in a foreign country, and cost of doing business and foreclosing on property in Mexico are higher. These loans are through US banks and are considerably lower interest rates than Mexico banks.
- There are currently no lot loans or construction loans available for Mexico property from US lenders. Many buyers are currently choosing to purchase a lot with the intention of building on it at a later time. There IS money available to build a home on a lot, but it is important to set this up properly with the initial contract to purchase the lot. These are not common transactions, and there is only one lending source that currently does this under very specific specifications, so it is extremely important to work with a broker who has experience with this type of transaction.
Financing in Mexico is currently available for Americans and Canadians, with USDollar loan programs and UK citizens and Spaniards with Euro-based loan programs. Purchase, non-cash out re-finance (better rate and term), cash-out refinance, and residential construction loans are available, and there are many methods used for qualifying. Commercial loans are also available for construction and existing properties.
It is smart to finance through a broker, rather than directly through a lender, because you have access to more options through many lenders, thus enabling you to truly find the program that is best for you. Also, a broker retains copies of all of your documentation, which makes it much easier to alter the direction of the loan if necessary – a lender does not return your documentation to you, thus requiring you to recollect everything should you choose to change lending institutions service providers.
Due to the downturn in the US housing market, current troubles in the US market, many mortgage brokers are beginning to turn to the Mexican market. Loan experience in the US or Canada is certainly valuable, but because the Mexican process is different in many ways, it is important for you, as a borrower, to be sure you choose a broker that is experienced in Mexico. The best way to ensure this is to ask the loan officer or broker how many loans they have closed in Mexico and to request contact information for references. Many brokers can open your loan and take it to a certain point, but then it dies; this is why it is important to inquire about the number of loans a broker has closed because this gives you a much better idea of the quality of their work. Also inquire about application fees and origination fees. Application fees should be no more than between $200 and $300.
Yucatan Haciendas has chosen to work with Mortgages In Mexico, LLC. Mortgages In Mexico was the first loan broker to open up in Puerto Vallarta (September 2004), they have loan officers all over Mexico, and they are now the longest tenured loan broker in Mexico. Their experience and professionalism, as well as their on-the-ground presence, make them the best choice for obtaining a mortgage. They represent all of the reputable sources of money available in Mexico and will be happy to discuss the available loan options. It is always a good idea (but not required) to be pre-qualified so you have a better idea of what to look for when you begin shopping for properties in Mexico. You can begin this process by visiting their website, http://mortgagesinmexico.web-loans.com/loancenter.aspx , and filling out an online loan application (please use the “long form”). Mortgages In Mexico’s website also has additional valuable information about financing and contact information for the loan officers covering your area (www.MortgagesInMexico.com). If you have any questions or would like more information on beginning your loan process, feel free to contact us via e-mail or telephone. If you have any questions about financing or would like more information on the process, please contact Doug Jones, President of Mortgages In Mexico at firstname.lastname@example.org, telephone # 918-398-90588 (US/Canada) or 555-350-6331 (from Mexico) or 01 212 706 332 (UK).