Once decided to buy a property, the problem of money transfer occurs. The way to do so will vary on each client or investor depending on issues such as banking regulations, personal accounting, economic stability, and currency. Mexico is a historically cash-based economy. There are many legal issues involved on how to enter money into a foreign country, and how to get it out afterwards if you decide to sell your property. When you finally find the property you were looking for, RTC Property will look into the more suitable alternative for you and provide with up-to-date information regarding the different options and its associated costs and procedures.
Financing in Mexico is currently available for Americans and Canadians, with US Dollar loan programs and UK citizens and Spaniards with Euro-based loanprograms. 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.
Currently the financing options for buying Mexico real estate are:
Financing from the Buyer’s home country
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 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.
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. 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.
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.
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 the 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.
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.
Process Purchase Sale
Most real estate transactions are opened after a written purchase offer is accepted by the seller and when purchase sale agreement is signed by both parties. In most cases, a deposit is required by the broker in order to transmit the offer to the seller. If the transaction is being conducted directly by the seller, it is recommended that a real estate broker or a lawyer be consulted before signing any papers or handing any money.
Normally, when signing the official deed, which needs to be certified by a Public Notary, the balance is paid and possession of the property is delivered. In general, this should not take more than 40 days.
Capital Gains Tax
In Mexico, the concept of capital gains tax does not apply in the sens in which it is determined in the United States. Here, the gain from the sale of the property is considered as normal tax rate up to 35%. In order to determine the gain, the following costs and expenses are deducted from the account for which the property is officially sold:
- The original land cost and the depreciated construction cost, based on the number of years the property was held and adjusted for inflation according the official consumer price indexes.
- Additions, modifications and improvements, but not maintenance, made on the property (construction), adjusted as above.
- Commissions paid to the real estate broker by the seller.
- The closing costs, including all expenses, taxes and fees paid by the seller.
The notary will retain the calculated gain after deductions forwarding it to the Ministry of Finances and Public Credit.
The seller will then deduct this amount against his/her annual tax return, which becomes an adjustable tax credit in US.
On the other hand, according with the ISR law, there is no capital gain tax in Mexico if the seller has had the property as his primary residence.