It’s important to think carefully beforehand about how you are going to finance your property in Mexico. This guide gives an overview of financing options available in Mexico for property buyers.
A realty agent in Mexico may be able to advise you, and some even have connections with financial institutions (banks, mortgage brokers) who may proffer financial solutions, depending on your personal circumstances, to help you complete your property investment in Mexico.
Historically, the overwhelming number of real-estate deals in Mexico have been settled in cash. However, with the stabilization of currency markets across the world, Mexican Banks are now beginning to offer mortgage products for the purchase of real-estate in Mexico, although significant deposits are required and interest rates are not as attractive as those in the US, Canada and Europe.
We have published this guide to give you an overview of the current-day situation in regard to financing real estate in Mexico as well as the options open to you and the financial considerations you will need to take into account.
Foreigners Financing Mexican Property
Mortgage Loans in Mexican Pesos
Mortgage Loans in US Dollars
Charges and Paperwork
Financial Considerations when financing Mexican property
Mexico is becoming an increasingly popular place for foreigners to buy property, either as second homes, vacation or retirement homes.
While traditionally these transactions would be conducted in cash, there is now increasing availability of financing for property, both in Mexican pesos and US dollars.
Nevertheless, with the growing interest in Mexican property, banks and mortgage companies have begun offering “cross-border” loans, lending money in dollars at dollar rates for the purpose of buying property in Mexico.
Some people who are planning to retire to Mexico will sell their house in their home country and use the proceeds to finance property in Mexico; those who want to keep a ‘base back home’ may release equity from their existing home, rent it out, and use the dual proceeds to fund their retirement home in Mexico.
Many foreigners are financing their property in Mexico using financial vehicles provided in the US or Europe and/or Mexico. This guide discusses the various choices to be made as well as the key elements to consider.
If you’re a foreigner living in Mexico and seeking finance from a Mexican bank, most banks will require that you have an FM2 (migrant) visa. However, banks will accept FM3 (non migrant visas) in some cases provided that you can produce your foreign bank statements which back up your financial circumstances. It’s not absolutely necessary to be resident in Mexico to get a Mexican loan in pesos.
Mexican banks have increased their mortgage lending in recent years, lowering interest rates and extending the length of the loans.
Obtaining a home loan in Mexico is a more complicated process, however, than in the U.S. or Europe. Part of the reason for this is that, in the event of a default, foreclosure on property is a lengthy and much more complicated process, so lenders take additional precautions.
Typically, Mexican banks offer loans ranging from five years to twenty years, although some offer longer loans.
It’s unusual for banks to finance 100% of the value of a property – although 80% to 90% is common these days, depending on the value of the home in question.
Rates of interest for the period of the loan are usually fixed for the term. Fixed interest rates vary with the length and type of loan, and currently fixed rates are between 11% and 15% a year.
Most of Mexico’s largest commercial banks are subsidiaries of large multi-nationals. Some have started offering, through U.S. affiliates, cross-border mortgages for Mexican real estate, lending money in dollars to U.S. and Canadian residents to buy property in Mexico.
This kind of financing is also being offered by a number of mortgage companies. The amounts being loaned for property acquisitions has been increasing at a steady rate, and the lenders involved in the process expect the amounts to expand even more rapidly in coming years.
The maturities and rates offered vary from bank to bank. Loans are available from three years to 30 years. Rates on dollar loans are lower than those on peso loans, but higher than those on mortgages for buying property in the U.S.
Some are fixed-rate, and others are linked to international benchmark rates, plus a premium. Also, the cross-border loans will be for a maximum 70% of the value of the property being bought, and the minimum amount of the loan is usually US$100,000.
Charges and paperwork requirements for these loans are similar to those for obtaining loans in Mexico (see below). They include minimum credit scores, mortgage life insurance, property damage insurance, official identification, proof of income, copies of tax returns and bank statements. They also include commissions for opening a credit, charges for credit score and property valuation. The same documentation related to the property are also required.
As with most financial loan products, there are number of charges and required documents to file in order for the credit to be released.
Common charges to open a mortgage account include: commissions, charges for conducting socioeconomic studies of potential borrowers (which some charge you whether or not the loan is granted), mortgage life insurance, property insurance, home valuation and Notary Public expenses (notary expenses are paid direct to the notary).
Checks and Research (Paperwork)
Before they lend you the money, the banks conduct extensive investigations of their potential clients, including proof of income, checking the credit bureau for your credit history reports, as well as socio-economic studies to assess the risk of the loan.
Among common loan requirements are:
- A minimum age, usually 18 but it depends on the bank, and not older than 70
- Proof of income (dual incomes can be considered for couples)
- Bank references and recent statements
- Official identification and proof of address
- Birth certificate and marriage certificate if applicable
- Immigration documents, e.g. FM2 or FM3
Documents related to the property such as:
- The sale contract
- Proof of down payment
- Copy of the deeds (of the land in the event the loan is for construction)
- Copies of receipts for rates and water bills
- Copy of architectural plans
Banks have been improving the ‘turn-around’ for loan approvals in recent years. Some will give a decision ‘in principle’ (subject to further investigation) within a few days and may release the funds within a couple of weeks. The process can take much longer, though, so you should be prepared for this.
Don’t get yourself into a non-negotiable or time-limited contract to buy a property on the basis of a loan given ‘in principle’ as the bank may take longer than you expect to complete the necessary checks and may even refuse the loan at the eleventh hour.
Even when the loan is agreed, it can take up to several weeks for the bank to release the funds. The key thing to keep in mind is: stay flexible and don’t paint yourself into any binding (time limiting) contractual agreements before the funds have been released by the bank.
For people who have dollar incomes, the idea of borrowing in pesos may appear attractive, given the possibility of the peso depreciating against the U.S. dollar, which would lower the payments (and overall debt) in the future in dollar terms.
While exchange and inflation risks are already factored into current peso lending rates, banks appear to be fairly confident that there won’t be a massive rise in local interest rates, hence the fixed-rate loans over periods as long as 15 or 20 years.
While that’s no guarantee that there won’t be a surge in interest rates, it’s also possible that a peso loan could work out more expensive over the life of the loan, if there’s no significant devaluation.
The sharp devaluations and surges in interest rates such as those that caused banks to pull out of the mortgage market almost entirely in the mid-1990s aren’t expected to be repeated. One indication of this is that the Mexican government is currently borrowing money in pesos from 10 years to 30 years at less than 8% a year.
A number of Mexican banks, in particular, have incentive schemes in place offering, for example, rate discounts for prompt payment. However if you miss a payment the discount rate disappears and the higher rate may be applied retrospectively to the loan.
Some schemes offer lower rates of interest at the start of the loan (“teaser rates”), but these are usually off-set with slightly higher rates later on. It’s important to consider the cost of financing over the entire term in order to understand the true cost of the product being offered to you.
Most (but not all) mortgage products sold by banks have no penalties for early payment. Check the small print before you agree to the loan if there is a chance that you may want to repay the loan early; for example, if you sell the property or pay-off the loan with the maturity of a different investment.
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