A: In recognition of a soft market, some realtors are recommending owner financing as an option for a quicker sale. While it makes sense for some sellers, there are pros and cons.

The most important question you need to ask yourself is: Do you need or want the full amount from the sale as quickly as possible? If the answer is “yes” then owner financing is not an avenue you need to embrace. Typically owner financing requires a hefty down payment on the part of the buyer and a short amortization period of 1 to 5 Years. This short amortization period represents a much higher monthly payment for the buyer – often 3or 4 times more than that of a 30 Year Loan. Frequently, buyers – even with the best of intentions when venturing into such an agreement – find themselves unable to continue making such large payments at some point during the course of the loan. Consequently, it is imperative when offering owner financing, that a seller perform a rigid cash flow and credit analysis to determine if the buyer (borrowers) can, in fact, afford the loan.

With a traditionally mortgaged client, you will have the entire sales amount in your pocket at the closing. There are a myriad of ways to structure owner financing, but it will still leave you unpaid for the full amount of the sale, until which point the final payment is made. Of course, the realtor will still receive full commission.

Another drawback for some is that this locks you into a relationship with your buyer for a number of years. If there is a non performance issue or loan default, do you have the stamina or time to pursue this legal matter in Mexico?

Also, if your buyer cannot obtain institutional financing, you might have to ask yourself “why?” If they cannot qualify for a traditional mortgage, is this someone who you want to enter into a financial relationship? Mortgages require the vetting of the buyer’s credit history and their ability to make payments. Do you have the tools to vet a potential buyer to the point that you have a comfort level?

Now, there are a some buyers who fall between the cracks and will not qualify for a traditional mortgage. For example: Canadian citizens that earn their livings outside of Canada. This is because, unlike the United States, Canadian tax laws do not require their citizens to file if they are working in a foreign country. We ran into this when we had a Canadian client who worked in the oil industry in the Middle East. He had an excellent credit history and earned more than enough to qualify to make payments and in addition had vast reserves of liquid assets. However he had not filed taxes in Canada, because he was not required to. The problem is that traditional Cross Border Lenders require tax returns as proof of income, therefore he did not qualify for these programs. We were very disappointed in not being able to obtain a mortgage in this case for an incredibly qualified client and friend. The seller offered owner financing and the deal went forward.

We would be remiss if we did not also include the upside of owner financing. First and foremost, is that you have sold your property. Secondly, you dictate the terms and most likely are charging interest on the payments, and therefore will stand to earn more than the sales price when compounding the interest.

In the years before mortgages were available for Mexican properties, owner financing was more the norm. These days, with a very few exceptions, why put yourself in this position unless you are solvent enough to take the risk for the small additional income?

A: All reputable mortgage brokers should be willing to give their clients a Good Faith Estimate or GFE outlining the costs associated with financing a real estate transaction. In the US, Truth In Lending Laws mandate a GFE be presented to and signed by a borrower seeking financing. Most banks lending in Mexico also require their approved brokers to follow these guidelines and supply clients with GFE’s.

Good Faith Estimates on cross border loans should provide an itemized list of all expenses pertinent to BOTH the Real Estate PURCHASE and THE LOAN. This is important to emphasize because closing costs, in general, are higher in Mexico than what most borrowers are accustomed to in the US and Canada. Historically, local custom has dictated the majority of the closing costs fall on the buyer. The consolation being that when and if you sell your property you then pass these costs on to your buyer.

If your Realtor or Developer gives you an estimate of costs prior to your getting loan approval – your Mortgage Broker’s estimate will reflect those costs PLUS the additional costs associated with obtaining a loan.

Costs for the property side of the transaction will include the cost of the Notario, the cost of obtaining an SRE permit, property transfer and acquisition taxes, trust application fees, first year trust fees, tax appraisal fees and all registration fees. These fees are largely non-negotiable (read: fixed) and formulas for determining their totals are issued on a Mexican federal and state level. They can vary widely between the Mexican States. For example, closing costs in Nayarit, Vallarta’s neighbor to the north, are different than closing costs here in Jalisco.

Costs included in the Good Faith Estimate associated with the loan will be broker fees, bank fees, processing fees, commercial valuation fees, appraisal fees, interim interest, title insurance – if applicable and insurance premiums. These will vary from broker to broker and from bank to bank.

What many borrowers do not realize is that there are currently as many as 15 different Banks Lending in Mexico and more entering the market as I write this column. Some are Mexican entities and others are based in either the US or Canada acting in partnership with Mexican Banks. Each of these Lenders has distinctly different loan programs and fees can vary considerably. However, generally speaking, banks with higher closing costs typically offer lower interest rates and those with lower closing costs offer higher interest rates. In addition, borrowers with excellent credit and easily documented income will usually see better terms over all – than those who don’t, won’t. These aspects of the Mortgage Industry in Mexico closely mirror those of the US or Canada.

Most importantly, remember that a GFE is an ESTIMATE given in good faith. Your mortgage broker should come within a reasonable margin of the actual, final costs. However, it is not an exact science and there are unforeseen variables which can change the numbers as you approach your closing; such as currency fluctuations, changes in tax laws which occur PRIOR to funding but AFTER loan approval and depending on the final, appraised value of the property.

A. Very secure. In the “restricted zones” along the coast or near the border, foreign buyers are required to place the property in a Trust (Fiedecomiso) with a Mexican bank. The buyer is the beneficiary of the Trust and it is saleable, will-able and automatically renewable after 50 years. As a buyer you have full rights of ownership, use and enjoyment. In effect, the Trust allows the transaction to act as “real property” for all intents and purposes. This is an excellent mode of protection as the Bank Trust (Fiedecomiso) places certain fiduciary obligations in the hands of a Licensed, Chartered Mexican Financial Institution. Financing adds an additional layer of protection deriving from the very thorough due diligence the Lender employs to investigate the deed of the property. Banks tend to be rather conservative and would not offer mortgages on Mexican Property without a very high confidence level in doing so. With financing, you not only have a Mexican bank looking out for you, you also have a US bank protecting your interests.

The Mexican economy has also been stable for many years and in fact, they are one of the top 10 emerging economies in the world. The Mexican people are rightfully proud of their emergence onto the world scene and you can be assured that there are no foreseeable changes in the future. The advent of NAFTA in 1993 has been the driving force behind this economic miracle by opening Mexico up to foreign investment and stabilizing their currency.

Mexico’s resort areas rank among the finest in the world and the Mexican government is committing vast resources into the infrastructure of these areas to ensure that they continue to attract investment.

Proximity: Getting to Mexico is very easy for both from the United States and Canada. Most major cities offer non-stop flights directly to major tourist areas and there are more being added every year.

The “Boomer” generation: The enormous amount of accumulated wealth by the boomer generation has never been matched. Today’s U.S. citizens and Canadians are much more adventurous than their predecessors. Instead of settling for Florida many are investing their real estate dollars in Mexico. Over 15,000 Americans and Canadians turn 55 each day. Last year approximately 400,000 foreigners looked south to Mexico as an option for a place to retire or for a second home.

Few people can resist the magic of Mexico and now that financing is available, it is much more attainable for all.

A: The Primary Mortgage Market is made up of a variety of players involved in the lending of money to the actual consumer. These players include the Borrower, Mortgage Broker, Mortgage Banker and the Banks who do the Lending.

The Borrower is just that – the person or entity seeking funds for either a purchase or re-finance.

A Mortgage Broker assists the Borrower in obtaining a mortgage. Mortgage Brokers typically work with multiple lenders, offering a variety of mortgage products. In general the more Banks a Broker represents, the better their success rate in obtaining financing for their customers. Mortgage Brokers generally receive a commission from the borrower, lender or a combination of the two in exchange for doing the majority of the “leg work” involved in packaging loan files, compiling and analyzing the extensive loan documentation and channeling the consumer into the loan program which works best for them. However, in Cross Border Lending within Mexico – most Banks do not pay brokers direct and the entire commission must be charged to the client as part of their closing costs. This may change in the future as consumer lending becomes more competitive in Mexico and some of the current borrower costs can be absorbed by the Banks.

Mortgage Bankers approve and close loans using their own funds – often using “warehouse lines of credit” from other sources. Upon closing, Mortgage Bankers typically sell these mortgages to outside investors. Loans are generally underwritten according to the specific guidelines of the investor purchasing the loan. This is why lending guidelines can often seem overly strict or rigid. If the Mortgage Banker or Broker doesn’t get every detail correct, according to these specific guidelines – the loan could end up ineligible for sale on the secondary market.

Banks do the actual lending of money to make mortgage loans. Banks have a choice of either selling the loan on the secondary market or maintaining the loan for their “in house” portfolio. Banks that keep loans “in house” are known as portfolio lenders. These loans are not automatically packaged for re-sale on the secondary market and therefore may not have to conform to investor guidelines.

Now this is where things get a little bit complicated. In Mexico – just as in the US, Canada and elsewhere – a borrower can obtain a mortgage by working with a Mortgage Broker, Mortgage Banker or Bank. However, some Mortgage Bankers and Banks have Retail Divisions and some only work Wholesale. A Bank with a Retail Division has Loan Officers on site that will take a client’s application and work with them on compiling the required documentation. Banks that work strictly wholesale will refer the client to an approved Mortgage Broker for these services. It is up to the borrower to know which entity they are working with and if they are being introduced to enough of a variety of loan products to effectively make a decision. Knowing the difference between Mortgage Brokers, Mortgage Bankers and Banks – can mean the difference between having options and getting the best deal or getting stuck with a loan program with unattractive terms.

In the very early stages of Cross Border Lending, just a few years ago – there wasn’t much of a Secondary Mortgage Market in Mexico and most of the loans written were held in the Banks Portfolios. However, at this historic time, there is tremendous interest in the Mexican Housing and Mortgage Industry by both National and Foreign Investors. Thusly, the Secondary Mortgage Market in this country is beginning percolate. The anticipated growth and expansion within this market will allow the emergence of additional loan products, competitive interest rates and higher rates of home ownership across the board – a very good thing indeed!

But if you want to tinker with some numbers on your own, loan affordability is based on a simple equation known in our industry as DTI, or Debt to Income Ratio. This is merely the percentage of monthly debt that you carry in relation to your monthly income. In other words, add up all of your monthly credit card payments, car payments, rent or mortgage payments, alimony, child support or whatever else you have that will show up on a credit report and divide that into your gross income per month. Only use the fixed expenses, don’t bother with grocery, electric bills and such. Following the above steps will give you what’s known as a Front End DTI or – not factoring in the new, proposed purchase.

For Example:
1st Mortgage: $1,500 (Per Month)
Credit Cards: 800
Car Payment: 600

Monthly Debt: $2,900
Income: $9,000

$2,900 Divided By $9,000 = 32.222 The Front End DTI is roughly 32%

Banks are more concerned, however, with Back End DTI’s. In order to calculate this ratio, simply factor in the monthly payment of the Proposed Purchase.

For Example:
1st Mortgage: $1,500 (Per Month)
Credit Cards: 800
Car Payment: 600
Proposed
2nd Mortgage 700

Adjusted Monthly Debt: $3,600
Income: $9,000

$3,600 Divided By $9,000 = 40.0 The Back End DTI is 40%

The above scenario would easily meet the DTI requirements for all of our Loan Programs.

It helps to have a mortgage broker go through this with you using your credit reports as you may not have a true indication of these numbers. Also, a mortgage broker can sometimes identify sources of income that you may not have remembered, or find payments on your credit report that can be subtracted.

While there are lenders for Mexican properties that will allow your debt to income percentage to be as high as 50%, most of them prefer that this figure be at or below 40% to 45% – with the addition of the new mortgage payment.

Cross border lenders are very conservative, which bodes well for your real estate investment. Irresponsible and aggressive lending practices just don’t exist in legitimate mortgage avenues in Mexico. This means an extremely low default ratio across the board which will only help to bolster current market values and indeed allow them to continue climbing. This is in direct opposition to what is currently happening in the U.S. market.

Prequalification is the first important step in embarking on the loan process. Know what you can afford and always borrow within your means.

Of course, our favorite is Puerto Vallarta.

Education is the only way to progress.

Great news!

Read the article here.

There’s a bill in the senate proposing to cap credit interest rates at 33% which is a lot lower than the average card rate. With little education focused on how to use credit responsibly, these proposed caps could save a lot of Mexican families from getting in over their heads with an unpayable balance resulting from exorbitant fees.

Read the AP story here.

What I liked about this article was the emphasis on how a home is basic human right and that Mexicans look at their homes not as investments, but as…well, a home.