21 Jul, 2023

Until now, most of Mexico‘s real estate deals were concluded with cash payments. Particularly those concluded by foreigners. This is the easiest way to buy real estate but getting a hold of that much cash may be difficult. Most foreigners postpone their acquisition dreams because of a lack of sufficient capital as borrowing was not an option. The reason was simple: Mexican banks do not lend to foreigners unless they are permanent residents and have at least two years of credit history in Mexico. Canadian and American banks don’t lend for the purchase of foreign real estate. This should not prevent you form buying your Mexican dream home. Here is what you need to know to finance your property acquisition in Mexico.

Borrowing Against Your Property

If you have equity in your property, you can use that equity to free up some cash to cover the purchase of a vacation home. This is referred to as a cash-out or refinance loan. Essentially you refinance your home for more than what is left on your original mortgage. The bank will lend you up to 75% of the value of your property less what is left on the original mortgage, if any. The difference is paid to you in a lump sum and you can use that money to purchase your vacation property. This is definitely more advantageous to you as the interest-rates in Canada in the US are much lower than those in Mexico {read our article on Why are Mortgage Rates Higher in Mexico}. Despite this, you may be confronted with a problem; most banks do not consider Mexican real estate as equity in evaluating your capacity to reimburse the loan regardless of whether you intend on renting the property to offset the mortgage payments. Mexloans can help. We can lend you money with a mortgage on your property in Canada or the US at competitive rates, and include the Mexican real estate as equity in your balance sheet when considering your application.

Financing by the Seller

Not many sellers or property developers offer this option but those that do proceed as follows. The buyer makes a substantial payment of the purchase price (50% or more) and the balance of purchase price is financed by the seller at an interest rate similar to those offered by Mexican Banks. The seller will retain title to the property until the buyer makes the final payment. This appears interesting but here is what you should know.

First, as the occupant of the property you have to pay all the expenses but you are not the owner. You are not entitled to participate or vote at HOA meetings. You need the seller’s permission to make any changes to the property. Payments to the service providers (electricity, gas, property taxes, HOA fees, etc) are made on the seller’s behalf (name) so the receipts are issued to their name. Those expenses are not deductible by you as operating expenses if you rent the property. If you want to sell the property before reimbursing the total of the sale price you will need the permission of the seller and they may insist on a “premium” if you are selling for more than the original purchase price.

Secondly, if the anything happens to the seller/property developer, such as their death if an individual or bankruptcy/insolvency as a developer, you may lose the property and all the money invested up to that point. Those replacing the seller may or may not respect the conditions of the financing.

Finally, and just as importantly, determination of the Capital Gains. Simply put: the capital gains taxes you pay will be determined by the gain (profit) you make when you sell the property and will be determined by the difference between the sale price and the purchase price. When you make the final payment on the balance of sale price, the seller will ask you to pay his Capital Gain between his cost of the property and the sale price at the time you notarize or title the property not when you bought it and made the initial payment. This can be a considerable amount of money. Likewise, when you sell the property your gain will be determined by considering the purchase price as of the day you notarize or title the property, not when you made the initial purchase. When you consider these factors, in particular the large amount of taxes you will need to pay when you actually title the property, this option may be much more costly than you imagined.

Getting a Mortgage in Mexico as a Permanent Resident

Assuming that you are a permanent resident of Mexico, which requires a minimum of one year of residency, and you have obtained a high credit score of 700 points or more in Mexico, a Mexican bank will consider you as a candidate for a mortgage loan. The average loan to value considered by Mexican Banks is 65%-35% so you will need to provide 35% of the purchase price, The interest rates are higher than those offered to Mexican Citizens as you are a higher risk of flight (you can easily leave the country if your investment sours). Rates vary between 10.5% and 12% as of June 2023. The average rate was 11.18% as determined by the Bank of Mexico in June of 2023.

1.Documents
Compared with financial institutions in the US and Canada, Mexican Banks are very diligent when investigating their potential borrowers. Foreclosing on real estate in Mexico is a very lengthy, difficult and expensive process as compared to other jurisdictions. Therefore lenders are motivated to find the best possible candidate. In fact, mortgage loans in Mexico are considered the “cream” of financing services offered by banks. Therefore the process to apply may take up to six months or more before getting an approval of your mortgage application.

You will need to provide considerable documentation in support of your application: public service utility bill (electricity bill is the favored option) to prove your residency; copy of your passport; your birth certificate (this needs to be Apostled in your country of residence and officially translated in Mexico); proof of permanent residency (FM2 card) with an official letter from the department of immigration confirming your address in Mexico; proof of income in Mexico, including salary or other source of income, for at least the last six months; a credit report which will be obtained by the lender with a minimum score of 700; your official Mexican tax number (RFC, or essentially the Mexican equivalent of your Social Security Number); your CURP (a unique population registration code issued by the Mexican government) and an up-to-date medical certificate confirming your good health if you’re over 45 years or older. Obtaining this information is time consuming and costly.

2.Expenses/Rates
Finally, additional to the cost of collecting the documents to apply for the mortgage, banks will charge several fees. Here is an example of fees required from the author of this article for a recent mortgage loan of $200,000 USD with a Mexican Bank (these amounts are additional to the closing costs discussed below)(the amounts were converted to USD): Appraisal fees $850; fee for opening the account $2,088.63; credit score fee $125 for a total of $3,063.63 just to apply. When you include the additional monthly fees such as life insurance, property insurance and account management fee, the actually interest rate of the loan jumped from 10.85% to 13.4%.

Borrowing with an Alternative Source

These circumstances have created an opportunity for alternative lenders in Mexico that lend money to foreigners to purchase real estate. However not all lenders are alike. Most of them are not regulated and lend money “privately”. In other words they find individual investors with capital to invest and lend it to foreigners at high rates as they act as intermediaries. When you calculate all the cost, expenses, and balloon payments required, your actual rate of the loan climbs to as high as 24%. Be careful and ask the right questions before dealing with them. Ask: “what is your actual rate of interest during the term of the loan?” (also known as CAT or Total Annual Cost); “are there any other fees I should know about?”; “any balloon payments (lump sum payments durning the term of the loan)?”. Finally, read the letter of commitment or financing proposal offered by these lenders and have your Mexican Lawyer read them as well to explain terms that may not be familiar to you.

Closing Costs

Foreigners suffer from “sticker shock” when they learn about the closing costs (which includes transfer tax, creation of the bank trust and fees, legal fees, registering the title, government fees and permits etc.) related to purchasing property in Mexico. In general, closing costs vary between 4 to 8% of the property’s value. This can easily reach $20,000 to $30,000 to add to the actual purchase price of the property. It should be noted that, although acquisition costs are high, costs and fees for maintaining the property are extremely low in Mexico as compared to the same property in the US or Canada. This is due to the fact that the majority of the closing costs represent sales and transfer taxes levied by local governments (2.5 to 3%) at the time of acquisition. However, property taxes and services are extremely low keeping living cost in Mexico lower by as much is 30% as what they would be in the US and Canada. Keep this in mind when calculating the total cost of your property acquisition, and, if necessary, add it to the amount that you will need to borrow from the lender so that you will have sufficient capital to cover the entire acquisition. Mention this to your lender as not all lenders in Mexico will finance closing costs. MexLoans does.

Where Do I Start?

When you’re ready for your life changing move, start by looking at your finances. How much money do you have for this venture? Then determine how much money you can borrow, considering the terms and conditions for foreigners buying property in Mexico. A quick indication and reference for you would be to use our mortgage calculator. Visit www.Mexloans.com.mx and enter the data to obtain an estimate of the amount your mortgage loan will cost you as well as the estimated closing costs for the purchase. If these amounts are acceptable to you, the next step would be to apply for a loan. You will receive a reply within 48 hours of your application, and if you approve the terms and conditions, you will receive a letter of pre- approval valid for 60 days. With this letter in hand, select a reliable realtor to help you find the property at those price points. Mention your pre-approval to your realtor. This will be an added benefit when it comes to negotiating with sellers.

Borrowing with MexLoans

Borrowing with Mexloans is as easy a borrowing in Canada or the US. There are no fees to apply. Just fill in the application form online and you will receive a pre-approval within 48 hours. An underwriter will then contact you to complete the information required. Some documentation will be necessary but they are easily obtainable and accessible to you. For example a copy of your title deed of your property in the US or Canada. No passports, no immigration papers, no birth certificates. If your application is approved, you will receive a clear and understandable letter of approval with all the terms, conditions and cost of your loan indicated in the letter. No hidden fees or expenses. Compared to other lenders in Mexico, we have the lowest interest rates and no fees or expenses. Apply now!