Over the past few years, more feasible, attractive options for financing Mexico real estate purchases have become available for non-Mexican buyers. If real estate buyers or investors plan to finance their purchase, there are steps they need to follow in order to make sure they are choosing the appropriate form of financing. While the steps are similar to purchasing with financing in other countries, there is some important information which buyers should be aware of during the process.
1. Evaluating Finances
As in any real estate purchase, a buyer needs to take the basic first step of evaluating their financial situation, before making an effort to find a property; how much money can a buyer invest into a Mexican property?
A closely related question is, can the buyer increase this amount through financing part or all of the purchase? A buyer must evaluate what monthly payments they will be able to make, or, more generally, what kind of payment plan they can manage. If the property is for investment purposes, the buyer must consider if the costs of financing (interest and fees) can be justified by the income or profit expected from the property.
2. Exploring Financing Options
After evaluating the numbers, a buyer will need to explore the financing options available and see if they fit into the plan developed. This is where the process becomes more specific to Mexico. Currently the financing options for buying Mexico real estate are:
A. Financing from the Buyer’s home country
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- Billions of dollars in funding available
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- This is not a loan. These tax credits do not need to be repaid
Until recently, this was the only secure way for non-Mexican buyers to finance a property in Mexico, and some buyers still take this approach. This means that buyers leverage the a mortgage against an existing property in their home country, at a banking institution from their country, using the funds to make a cash purchase in Mexico. Typically the financing amount will be 50% of the value of the property back home. The advantage is that buyers are dealing with an institution and process they are familiar with, and quite possibly a property that their home bank is familiar with.
B. Mortgage from a Mexican Institution
This option is relatively new, and has been available for about 5 years – for Mexicans and non-Mexicans alike. Previously, Mexicans usually relied on informal loans from family and friends, or informal seller financing with risky personal contracts. Mexico mortgages appeared as one of the later outcomes of NAFTA, and the government and banking institutions have been cautious in easing regulations and releasing this kind of funding. For this reason the process is longer and includes more paperwork compared to processes in other countries.
The upside is that property buyers can leverage their financing against the same property they are buying, leaving their property back home free of risk from any loss. Interest rates are attractive right now, around 6.5% in May 2010, and institutions will finance up to 75% of the purchase value. Banks also offer various types of mortgage options, including fixed or variable rates, and mortgage "packages" where property insurance, for example, (which is required for this kind of financing) is included in the monthly payments.
A consideration to be made when evaluating this option is that, in Mexico, banks require higher credit scores, and the buyer’s debt-to-income ratio must be lower, compared to requirements in the U.S. or Canada. Mexico also charges a small tax (1.4%) on bank mortgages.
C. Seller Financing – Bank Trust in Guarantee
While in the past, seller financing in Mexico was very unofficial and risky, the process of making a down payment to a seller and paying installments for the balance is now a very secure process, and is becoming more common for international purchasers.
The buyer and seller can now make this process official through a "Bank Trust in Guarantee," which is a legal document naming the buyer as the beneficiary of the property and the seller as the secondary beneficiary. The document details the payment terms, guaranteeing that the seller will receive all payments on time, and that the buyer will have legal and physical possession of the property while payments are being made. The notarized bank trust is registered in the public registry, and is as formal as a bank mortgage.
While the initial costs of setting up this trust are higher and a very slightly higher tax of 2% is required, sellers often charge very low interest, or sometimes none at all, more than balancing these initial costs.
3. Credit Pre-Approval
After exploring the options, the buyer will have to decide which is most suitable. The next step is to gain pre-approval for a mortgage. It is important to note that it is usually not be the best idea to apply for pre-approval more often then necessary. First the buyer must make sure they have investigated their options well, and have complete information about each institution. It will also be helpful to speak with a mortgage broker or real estate expert to develop an overall strategy in this application process. Once a pre-approval certificate is given, the buyer will know exactly which property price range they can search for; even if a buyer is looking for seller-financing, this is an important step in order to keep options open.
4. Property Search
After the bank prepares the buyer credit report and provides the pre-approval document, the buyers will be prepared to begin searching for a property, knowing exactly which price range they can consider. Following these steps will eliminate time spent on searching for properties that do not fall into the buyer’s financing possibilities, and if a suitable seller-financing option is found, this will be a plus for the well-prepared buyer.