Financing Mexican real estate is a relatively new thing insofar as the lending products that we are accustomed to have just been made available. Sure, in the past “spot money” was available, but on a very, very limited scale. Having been a pioneer in this adventure to my knowledge there was not a substantial lender willing to make a real commitment to this endeavor until GE, having emerged from their beta program, rolled out their Mexican Dream Mortgage program in August of 2005. Since, there have been some other big players enter the fray, such as GMAC and BBVA, and others following close behind will be offering their products as well. This is all good news for everyone - Borrowing money for the purchase of real estate in Mexico has never been easier!

There are a few things to be attentive to, lenders want to make loans there, but it is important that they be “saleable” into the Secondary Market on Wall Street. Mortgage money comes from investors who buy portfolios of loans. So that these portfolios have some uniformity the lenders have underwriting standards or guidelines. It is not only important that the loan is “a good loan” but it needs to conform to the guidelines. These guidelines include credit score standards, employment standards, debt to income ratio standards, reserve standards, documentable income standards, loan-to-value ratio standards, etc.

Basically, there are three parts to be evaluated and approved by the lender: the Buyer’s willingness to repay the debt (the credit report and the credit scores); the Buyer’s ability to repay the debt (the employment, assets, income, debt to income ratios. etc.); and the collateral (the appraisal, title work, escritura publica, insurance, etc.).

Evaluating the Buyer’s willingness and their ability is pretty much the same as it is in the United States, but working with the collateral is very different. Appraisals are extrapolations of values based upon what comparable properties have sold for. The problem in Mexico is that frequently properties are sold for more than is reported and then under-reported so that the Seller doesn’t have to pay the capital gains tax on the whole amount. This can result in the appraisal values coming in short of the sales price. This can lead to the Buyer having to put up more cash at closing to make up the difference between the loan-to-value ratio (LTV) the lender is comfortable with and the appraised value. This also sets up a future tax problem that the Seller merely moved to Buyer. Be wary here this can be a VERY expensive future problem for the Buyer.

Both First American Title and Stewart Title are offering title insurance services in Mexico, and you should consider using their services to clear title. Buying and owning property in Mexico can be really safe, but a buyer should have an understanding of the actual conveyance method utilized in Mexico and how legal title or beneficiary interest (Fideicomiso) is vested and recorded for foreign purchasers. Let the professionals (significant authorities) do the due diligence and insure it, too. You’ll be more secure and happier about it.

In the United States, we use title companies, escrow companies, and escrow agents, but in Mexico they use a notario publico (public notary). Although their title translates to “public notary”, they are really attorneys who, after passing exams, are appointed for life. Their responsibilities include the preparation of the deed in accordance with the purchase-sale agreement, and the formalization of signatures. The notario brings buyer and seller together for the formalization of the property transfer. After it has been formalized, the notario will record the escritura with the public registry of property in the locale where the property is. Importantly, the notario is also responsible for the collection of all applicable taxes and government transfer fees, but they do not hold the escrow money like they do here. We have found it safest to keep the money in trust accounts in the United States administered by fiduciaries (i.e. First American Title) and release it at the time of “funding”.

One of the areas most overlooked when purchasing Mexican property are tax implications, and oftentimes there are enormous tax opportunities, which may be exploited. Frequently the structure of the transaction will offer substantial savings far exceeding the savings most people find when they only attend to the interest rate and closing costs. Many have found that even though the price cannot be changed, the cost often can. The interest rate, and other costs, frequently pale in comparison. It is best you consult with a professional to plan your investment in Mexico to take advantage of all the financing and tax advantages available to you.

Don Hearn
Owner
Advanced Mortgage in Mexico