Purchasing Mexico Real Estate 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. Perhaps the biggest difference in investing in Mexico and your home country is that once you put cash into a property in Mexico, it is very difficult and expensive to pull any equity out (see # 5 below
- Leverage. In other words, use the other guy’s money! As your home begins to appreciate in value, it will increase at the same amount whether you have invested 25% into your property or 100%. If you have $500,000, you could use all of it to pay cash for a $500,000 property and gain around $30,000 in annual appreciation at a modest 6% 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 on your appreciation is higher ($30,000 gain on $150,000 invested vs. $30,000 gain on $500,000 invested), 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.
- Use a mortgage to supplement your purchase into a more expensive property that you prefer. For example, you may have enough cash to get into a property for $200,000, but you really prefer to live in a $300,000 property. You can buy a $300,000 property and then get a mortgage for $100,000. You can then pay this off early, or pay it off over the full term of the loan.
- 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. The lender basically “runs interference” for you by making sure your property title is perfect, or they won’t close on the loan.
- 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. If you decide to get a loan sometime after you close on your property, remember that you will need to have an income stream sufficient to qualify for your loan. We are seeing many people who have owned a home in Mexico for a long time who need to pull cash from the equity in their home, and they don’t qualify. Save yourself the heartache and put the minimum amount of cash into the property as long as the monthly payment makes sense.
- It has become difficult and expensive to get a home equity loan in your home country. Buyers used to bring cash to Mexico to purchase a property. This doesn’t mean they had buckets full of money lying around, but rather they got a home equity loan in their home country. Equity in properties has diminished, and it is much more difficult to qualify for an equity loan in the US or Canada. Even if you DO have equity in your property, interest rates have gone up, loan fees have gone up, and underwriting guidelines have become much more difficult for an equity loan approval. Likewise, most people would rather keep their loan obligation secured by the property in Mexico, rather than having a loan in their primary residence for a second home in a foreign country. It just makes more sense to let the lender in Mexico shoulder most of the risk – usually 75% of the purchase price and you only invest 25% of your own money.
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. A broker can take the same documents and send them to a different lending source if a better loan program becomes available.
Due to the downturn in the US housing market and current troubles in the US mortgage 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 their experience and the quality of their work. Also inquire about application fees and origination fees. Application fees should be no more than between $200 and $300.
Baja Real Estate Group - Beachside Realty Mexico has chosen to work with Mortgages In Mexico, LLC. Mortgages In Mexico was the first loan broker to open up in Mexico (September 2004), they have loan officers all over Mexico, and they are a trusted and successful mortgage lender in Mexico. Having closed hundreds of loans 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 with you. 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
, telephone # 918-398-9588 (US/Canada) or 555-350-6331 (from Mexico) or 01 212 706 332 (UK).
© Copyright 2011 by Doug Jones, Mortgages In Mexico, LLC. All rights reserved. Used with permission of the author.