What to ask your lender before you sign for a Mexican property
You’ve made the decision to purchase real estate in Mexico and you will need to finance part of the acquisition. You realize that you can’t get financing in Mexico as you are not a permanent resident, and you don’t have a credit history in Mexico. Your bank won’t lend to you to purchase real estate in a foreign country unless you have substantial assets on which they can secure the loan in your country. So, you’ve looked for alternative financing in Mexico. Fortunately, there are several sources to consider, however not all lenders are the same. Here are six critical questions you need to ask your lender before you commit.
- Who are you?
Get to know your lender. Are they a private individual or a lender that is regulated by a public authority. Are they licensed to lend? The difference is important. A private lender is not accountable to anyone. You cannot complain about their conduct, and they are not obligated to be as transparent as you would like them to be. Their values and ethics may not be what you expect from a lender. On the other hand, regulated lenders are accountable to the authority that controls them. They are held to a different standard than private lenders.
Also, how long have they been in the business? If they are new to the industry, it would be difficult to gauge their performance with other borrowers. Inexperienced lenders cannot help you consider all your options before borrowing and may not help you if you encounter financial difficulties during the term of the loan. Their first reaction in the event of a delay in payment may be to “trigger” the security and not attempt to negotiate alternate resolution methods.
- What is the APR of the loan
Most lenders, including banks, will advertise an interest rate that is lower than the actual rate that you will be paying if you consider all the associated expenses in relation to the cost of borrowing. That is why you need to ask what is my APR (Annual Percentage Rate)? Essentially what is the total cost of borrowing money?
There are two types: Valuable APR which will change because the interest rate will vary from time to time. If the rate increases, then you will pay more to borrow money. This makes it difficult to plan your finances. With Fixed APR there is no variation of the rate, so the amount paid remains the same.
To calculate the APR, you need to know the interest rate, the term of the loan (number of years to reimburse it) and, most importantly, the total costs charged by the lender for the loan. This includes any fees such as lender or origination fee, lender legal fee, appraisals, application fees, title insurance and life insurance.
- What happens at the expiration of the term?
Loans are granted for a fixed term, that is the number of years you have to reimburse the loan. At the expiration of the term, you’re expected to reimburse the total capital and unpaid interests. You will also be required to assume the cost of extinguishing the security given for the loan (for example a mortgage). At the expiry of the termcan the loan be renewed and how will the interest be determined. Will it be the prevailing market rate? Will the lender have additional conditions or terms to renew it? Will there be additional fees such as valuation of the property, credit reports etc.?
- Will my application affect my credit rating?
When you apply for a loan, the lender obtains a credit report (referred to as a hard inquiry) on your credit history to evaluate your application. This normally will influence your credit rating. It may drop by 5 to 10 points in some cases as it will indicate that your debt is increasing. In most cases this will not have an impact on your overall credit rating, and it will return to its previous normal 2 to 3 months after the inquiry. However, when you obtain your own credit report (known as a soft inquiry), this will not have an impact on your credit score.
Therefore, it is recommended to ask your lender if they will offer you conditional approval based on you providing them with your credit report. If you accept the conditional approval, they can then obtain your credit report themselves to verify its authenticity. If they reject your application or if you reject the loan terms this will not affect your credit score.
Finally, if you are rate shopping for a loan do this within a two-week period. Multiple credit report requests for the same type of loan will not have a greater impact on your credit score.
- Can I deduct my interest payments from my taxes?
US citizens can deduct the interest payments made on a mortgage loan on their home and secondary residences. Canadian citizens can deduct interest payments on a mortgage loan only from rental income generated by the secondary property. They cannot deduct interest payments on their home mortgage loans. To deduct these payments US Citizens, need to obtain a Form 1098 from the lender. Will the lender provide you with this form, thereby reducing the impact interest payments will have on your finances?
- Can I make capital payments on the loan?
Making capital payments against the loan will greatly reduce your total APR as subsequent payments are calculated on the outstanding balance. For example, if you happen to have $5000 available and you pay it against your capital, the interest in the subsequent month will be calculated on the new outstanding capital.
Some lenders permit this feature; however, they will limit it to a percentage of the total loan. For example, they will allow you to pay down up to 10% of the capital of the loan per year but not more. Others will permit you unlimited capital payments. This feature can save you thousands of dollars over the term of the loan.
Borrowing money is never easy. Whether in your country of residence or Mexico. Take the time to investigate and consider all your opportunities. Consider alternate methods of financing. And above all know your limits. A reasonable, responsible and ethical lender will help you identify the maximum that you can afford to borrow without in debating yourself to the point that you can no longer meet your financial obligations.