Q: What are the advantages and disadvantages of incorporation & citizenship?

Colette Désy A: The major advantage of incorporation or citizenship is that you can avoid having to establish and maintain a Bank Trust (Fideicomiso) for property purchases. The Mexican government views a Mexican corporation similarly to that of citizenship and therefore no Bank Trust is required for purchases in the restricted zones – those areas near the border or coast.

The costs of forming a corporation can vary greatly, depending on the type of corporate status you are going for. However, the tax implications should be weighed carefully; particularly when it comes to Capital Gains. Capital Gains taxes vary considerably for Individuals and Corporations and MEXLend recommends its purchasers considering Incorporating within Mexico for the sole purpose of purchasing property, consult with an attorney experienced in both Real Estate and Tax.

For some it may be a wise decision, for others an unnecessary one. For more detailed information on Capital Gains Taxes in Mexico, please see Wayne Franklin’s beautifully written column on the subject in past Tribune issues numbers 516 and 517.

From a mortgage viewpoint, the great advantage are the tax write off implications that it can represent if you have a US Dollar mortgage. The disadvantage of buying property as a corporation is that Mexican banks will not finance a Residential Purchase in the name of a Corporation, only our private Lender Funds will allow this corporate structure.

Becoming a Mexican citizen is a serious step involving a great deal of forethought and commitment. If you thinking of becoming a citizen solely for the purpose of buying a home, then you are on the wrong track. If you become a Mexican Citizen because you love the country…then welcome! For the vast majority, the Fideicomiso (Bank Trust) is a secure instrument for foreigners looking to purchase in Mexico and buyers should not be daunted by it. By far, most foreign purchasers go this route.

Both Incorporation and Citizenship can offer advantages.

However, the important point to note is that neither is necessary for home ownership in Mexico.

Financing is available for Dual Citizens, US Citizens, Canadian and Mexican Citizens equally.

Mortgage Financing is also available for anyone who can provide a credit report from their country of origin.

MEXLend currently works with 7 Different Lenders, offering 56 Different Loan Programs. Regardless of a borrower’s citizenship, it is likely we have a mortgage program to fit most needs.

MEXLend, Inc. is a Mexican mortgage brokerage offering loan options in Dollars and Pesos for buyers looking to purchase vacation or investment property throughout Mexico.

Q: What is a Trust and why is it needed? Alicia M., Vancouver, B.C.

A:
For historical reasons, the Mexican Constitution forbade foreigners from buying property in designated restricted zones. These zones are comprised of areas near the Mexican border and areas near the coast. The advent of the Trust became a device whereby the government could allow these transactions to occur and bring in an influx of foreign investment. A Trust behaves very much the same as a trust in the US. The purchaser is the beneficiary of the trust and controls what happens in the future with the property in the Trust. It is automatically renewable in 50 years, it is willable and sellable and in all respects allows the beneficiary or foreign purchaser to treat it as real property.

Actually, it is a terrific tool for protection of your investment as this puts a powerful ally in the path of any questions concerning the deed. For further in depth information, please log on to the website of your realtor or mortgage broker or call them. We/they would be happy to talk with you.

MEXLend, Inc. is a Mexican mortgage brokerage offering loan options in Dollars and Pesos for buyers looking to purchase vacation or investment property throughout Mexico.

Q: How Does the Loan Process Differ? Paul, V, Minneapolis, MN

A:
Not as much as you would think, primarily with governmental involvement, closing times and costs. With a US dollar loan, many aspects of the loan process in Mexico are strikingly similar to those in the United States.

For example: MEXLend uses a standard, 1003 Application, Good Faith Estimates for Closing Costs and Disclosure Forms, all of which will be familiar to anyone who has obtained a mortgage North of the Border. And just like the U.S., a commercial appraisal is ordered for purposes of valuation. We adhere to U.S. Standards of Best Practice and Fair Housing.

Where things differ, is the importance that the property information plays and the level of involvement of the Mexican governmental agencies in the process. In addition to satisfying US Lending Requirements, we must also honor Mexican Banking and Real Estate Laws. This is where things become a bit more complicated. Imagine what a real estate transaction would be like if every step of the way you had to apply for permission from the US Federal Government, wait for it to be processed and finally permission granted!! Here in Mexico, that is exactly what transpires.

All foreign purchasers, including all cash buyers, must apply for and obtain a permit from the Foreign Affairs Department in Mexico City. This “SRE”? permit, once issued, is the “permission”? for the transaction to take place. All further documentation including the Trust and recording of title, depends on the timely issuance of this permit.

Also the Mexican government requires that foreigners purchasing property in areas near the border or along the coast do so utilizing a Bank Trust or Fideicomiso. (It should be noted here that all US Lenders require a Trust, no matter where the property is located) A government appointed Notario must complete a thorough title search; issue a Certificate of No Liens; and sign off on the transaction.

These additional steps must be coordinated meticulously with the lending process, as accuracy and timing are critical to a smooth closing. When all parties arrive at the closing table, the signing and transfer of title again, mimic a closing in the U.S. or Canada.

Peso loans granted by a Mexican lending entity are specially attractive for expatriate U.S. citizens who have made moved to Mexico for a number of years, Mexican Nationals, Canadians and Europeans. The process is similar to the dollar loans, however documentation varies a bit from the standard in the United States. Your mortgage broker should still provide you with a good faith estimate.

The cost of a loan can be different here in Mexico as well. Most loan programs require a 30% down payment for the purchase and the interest rates are mostly around a percentage point higher than you would receive in the United States. Bringing these loans to closing is highly labor intensive and expensive for both the banks and your mortgage broker.

However, if you juxtapose the costs against the high rate of property appreciation we are enjoying here, the costs are more than offset. Be wary of promises of 10% down payments! They exist, but at this time, only for peso loans and only for a small percentage of borrowers and always have double-digit interest rates.

Financing a property can add a bit more time to the closing process than an all-cash sale; but this can be kept to a minimum with proper communication and due diligence between your real estate agent and mortgage broker. When all of the pieces fall into place correctly, loans can be funded in 60 days or less.

Remember that even “The Donald”? doesn’t pay all cash for his real estate investments. It is always more advantageous to keep your investments diverse and your assets as liquid as possible.

Q: What Type of Loans are Available? Stephanie C., Chicago, IL

A:
US Dollar loans from private sources and Mexican Peso Loans from Mexican banks. For general purposes, the loans available fall into one of the five following categories: Purchase, Refinance, Home Construction, Peso Loans and Commercial.

Loans are available for both Vacation Homes and Primary Residences. Vacation Home Financing is available through US and Mexican lenders.

Purchase Loans for second homes and condos comprise the greatest volume of lending from US lenders. You see a home or condo, and decide to buy. The market in Puerto Vallarta and The Banderas Bay Area is just about as exciting as any in the world with stellar returns and a dream home for every taste and budget. In Puerto Vallarta we enjoy the services of well organized and extremely knowledgeable real estate professionals. Our firm has closed loans all over Mexico, and believe me, we appreciate the professionalism of the local real estate community!

A sub-category of the Purchase Loan is the “Pre-Construction Loan.”? It is possible to obtain a “Pre-Construction Loan;”? however, the lenders will not close and fund such a loan until the project is finished and ALL of the property documentation requirements are met. This means that the developer must be amenable to the financing terms. Not all are, but more and more are becoming open to these arrangements so approach your mortgage broker to inquire about a specific project. It makes absolute sense that a lender will not fund until the property legally exists at a value in keeping with the sales price. In Mexico, a property does not legally exist until there is title and tax documentation registered by and with the government. This is a standard that should be kept in mind when venturing into a pre-construction contract. A closing is not a closing until those documents are registered and produced with and by the Mexican government under the auspices of a Notario. The majority of “closings”? on pre-construction condos are actually use and occupancy agreements—not legally binding closings that provide true ownership. Always consult legal council before signing a pre-construction contract of sale and be fully aware of the risks involved.

Refinancing is an area that we feel will explode in the coming years. As with a purchase loan, all of the property documentation must be in place. When MEXLend launched in 2005 we had very few Banks offering cash-out re-financing loans. Now most do, with even more lending options on the horizon for 2007. Over the years the vast majority of property purchased in Mexico has been on an all-cash basis. Refinancing allows you to take a chunk of that pent-up equity and use it to make more money. That is the bottom line: use your money wisely and make it work for you without having it tied up in one asset. Leveraging is the key to increasing wealth and Mortgage debt is good debt! Spread your risk and increase your wealth. We cannot say enough about this product. As Martha Stewart would say, “It’s a good thing”?.

Home Construction loans, sometimes called “Construction to Permanent Loans,”? are becoming more popular as the areas North and South of Vallarta are developed. Documentation of financials, property and construction is extensive for these loans. Basically, banks require all of the information that you should require of yourself before taking on a project of this magnitude in Mexico. Often lenders ask for a larger commitment of personal equity in the project.

You will need to provide architectural plans, engineering reports, permits and a cost breakdown of both interior and exterior space per square meter as well as a list of materials to be used. For example, there is a huge difference if you are planning to build with marble versus ceramic tiles for flooring. It will affect up-front cost of construction as well as the value of the property when finished. The lender needs to know.

Don’t let these home construction requirements be daunting. Talk to your mortgage broker at any stage of the project…even before purchase of the land. Your broker in partnership with the lender will help you. You can be pre-approved or even obtain a loan commitment with only your financials and your plans. If the lender is interested in your project, they will provide you with conditions to be met before funding.

Peso Loans are available for Mexican Nationals and those who for the most part have officially expatriated. While the interest rates are a bit higher than US lending counterparts, they are becoming more and more competitive. Most require lower down payments and the monthly payments become much more attractive when you convert from dollars to pesos. The exchange rate almost always favors your dollars, making the payments even more affordable.

Remember, that you are dealing with a Mexican lender and these applications will not be in English, although your broker may provide you with a translation. The requirements may differ from US Lenders. Always keep in mind that these loans are primarily geared to the Mexican National, so you have to put your head into that mind set. These loans have become extremely popular among those who have more-or-less moved to Mexico on a permanent basis or for US citizens who are seeking smaller loan amounts.

Commercial lending is a field unto itself. Few brokers offer these loans, as they are very complicated to underwrite. In addition, they require a substantial investment on the part of the developer in equity, but also in cost breakdowns and marketing strategies. Currently, commercial loans are offered for five million to twelve million dollar projects. There are exceptions to these loan limits, but these loans are not primarily for the small mom and pop developer building a three-unit condominium or buying a commercial local. MEXLend is currently in talks with several commercial banks in an effort to launch a product geared to the small-scale developer. Expect this late 2007 or early 2008.

The Loan Programs outlined above allow those interested in purchasing property in Mexico greater flexibility and options on how to use their money wisely.

When you purchase with a mortgage, you are not only freeing up your liquid assets, you are taking on a partner who shares your risk and who has a vested interest in making sure that the title is clean and the purchase is safe.

Remember too, in many cases mortgage interest is tax deductible – even on your Mexican Dream Home!

Q: I am hearing more and more about re-financing here as an option. What are the advantages and disadvantages of refinancing in Mexico?” Steve Y., Coeur d’ Alene, ID

A:
Refinancing is one of the most exciting new offerings from our US. investors lending in Mexico. Softel estimates that in 2006, only 10% of housing stock in Mexico has financing attached. That means that 90% of all condominiums and homes are owned free and clear. This leaves an enormous amount of pent-up equity that can be utilized for property improvement, debt restructuring or diversifying investment.

By cashing out on some of the equity in your property you can dive into home improvement or other investments.

There are many advantages to refinancing or cashing out on your Mexican property. The foremost of which is putting money in your pocket instead of having it all tied up in your second home. Property values in Mexico have been on a rapid, upward rise. You can take advantage this equity through the purchase of another investment property and increasing your net worth or improving an existing home. All of this represents a fantastic way to hedge your investment and build a larger retirement portfolio. Perhaps you have been waiting to update your kitchen or bath or even add another bedroom. Maybe you’ve waited to build that infinity pool. Another Condo or Home purely for investment? Either way, a Cash-Out Re-Finance is the best way to go… ¿por qué esperar? / why wait?

The major advantage to taking on a mortgage in Mexico as opposed to the US is that the lien is tied to the Mexican property. As mentioned the Mexican Real Estate Market is in upward motion and is expected to continue as such for the foreseeable future. Prices for homes in the US have been falling in many markets. Many of our clients have also considered re-financing property in the US. For some this may be the best way to go but for others it could be a recipe for disaster. The last thing you want to do is max out on the Loan To Value (LTV) on a property in a declining market. You could be subject to PMI – Mortgage Insurance and in a worst case scenario – you could find yourself with a loan greater than the value of your property. Luckily, neither scenario is likely any time soon in Mexico!

The downside of refinancing is that you are putting a lean against a property that you already own. You will incur the cost of the loan and must be able to maintain monthly mortgage payments. We have all heard about the problems that are happening in the US with the lending industry. Mortgage Lending in Mexico is relatively new. Banks are quite conservative and they aren’t allowing borrowers to borrow beyond their means. This all translates to added protections that have fallen by the wayside with Loan Programs Stateside. Right now it can actually be far wiser to borrow against a Mexican Property than a US Property. As always, though, the golden rule applies – Always Stay Within Your Comfort Zone and Borrow Within Your Spending Limits.

Most brokers working within Mexico have a vested interest in your financial health. We are your neighbors. Helping you to increase your wealth and attain your dreams is our goal and taking advantage of these new refinancing products is an amazing opportunity to achieve your aspirations.

Q: “Are there any private lending resources for buying in Mexico?” Timothy Wilson

A:
Yes indeed – there most certainly are private lenders available for real estate purchases in Puerto Vallarta, just as there are in the U.S., Canada and elsewhere. Our Private lender program is extremely strong at this point with loans closing throughout Mexico. Private lenders can move faster and often it is easier to qualify with a private lender than a Mexican Bank.

Q: “How would I go about selecting one Mortgage Broker over another? Don’t you all offer the same products and services? Yolanda Fisher, Denver, CO

A:
Choosing a Mortgage Broker in Mexico is a lot like choosing a Realtor or Attorney anywhere else. A referral from a trusted source is almost always the best way to go, as the quality of service, attention to detail and processing times can vary quite a bit between firms. Your Realtor or Real Estate Attorney will most likely be able to offer some sound advice on “who”? best to service your needs. In addition, all Mortgage Brokers in Mexico DO NOT offer the same products and services. Some have aligned themselves with only 1 or 2 Lenders – while others have a much broader spectrum of products.

Below is a list of questions a borrower should be prepared to ask before beginning a relationship with a Mortgage Professional in Mexico.

1. Have you closed any loans in Mexico?
The Mortgage Industry is still very new in Mexico and as it continues to establish itself, some companies have only just opened their doors. Frankly, it is a lot more labor intensive to write loans in Mexico than in the US or Canada and not every Broker has the knowledge or stamina to see the process through. That said, you want to go with a Mortgage Broker with a proven track record of ACTUALLY CLOSING Loans, preferably in a timely fashion.

2. Where are your offices located and where are your loans processed?
Some Mortgage Brokers dealing in Cross Border Lending operate their Mexican Businesses as a sideline to their US Mortgage Operations. Some maintain “bricks and mortar”? office space in Mexico, some have Sales Representatives or Loan Officers on the ground here – while maintaining office space in the US, where the processing occurs and still others only operate from the US via phone, fax, e-mail and overnight express.

At the very least, your mortgage broker should have some one on the ground in Mexico, in the area you are buying, to facilitate the signing and delivery of documents and to navigate the various bureaucratic systems here. Mexican Loans can be far more complex than in other areas and a physical presence is key to expediting a seamless closing. Also, Mexico has not yet completely embraced the notion of “e-commerce”?. Notarios, Realtors, Bank Trust Managers, Attorneys, Developers, etc . . . all prefer a modicum of face-to-face negotiations when conducting business. This instills a sense of trust and accessibility – which bodes well for a smooth transaction.

In addition, working with a Broker who deals exclusively with Cross Border Lending will likely afford you a higher level of expertise and client satisfaction. If you think about it – do you really want to work with someone who is concentrating on two entirely different processes at the same time?

Lastly, it is virtually impossible to process a Mexican Loan entirely from a US office. Cross Border Loans are document heavy and the Mexican Authorities require original signatures on most items. The ability of a local Mortgage Broker or Loan Officer to hand deliver signed originals – in pinch – goes a long way towards a smooth closing.