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It’s a pretty good bet. If an American or Canadian’s Los Cabos home is more than three years old, it is very likely owned outright. Hard as it may be to believe, financing for vacation homes here is a relatively new trend.
Most of the earlier home buyers brought cash, used seller carryback, or leveraged their primary home to make the deal. The reason was simple: The little bank financing that was available came at extremely high rates and the closing process was lengthy and laborious. Developer financing, which also was available, averaged rates of 10 to 12 percent.
All that changed several years ago, when the first true mortgage lenders began funding purchases for U.S. citizens in México, with programs for Canadians coming shortly thereafter.
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These lenders were careful about selecting their clients and are experiencing very few of the troubles plaguing the U.S. mortgage market. (Those few Mexican mortgages at risk are due to the borrowers’ financial problems back home.) As a result, the offers lenders are able to make to foreigners purchasing in México continue to improve, with rates and terms becoming very similar to those available in the United States and Canada.
What Can I Get?
As in the United States, the rates offered vary almost daily. At press time, most borrowers were being quoted rates around seven percent. The rate you are given will depend not only with the institution providing the loan, but also on your credit score and the size of the loan. For this reason, potential borrowers should shop for their loan directly with the lenders; your real estate agent is not qualified to give you more than a rough estimate. Remember, lenders participating in cross-border financing are conservative. Expect to put down a larger initial deposit than what you’re used to in the United States or Canada: Twenty percent is generally the minimum, and some lenders require a 30 percent down payment. Whereas seller financing is generally short-term, the period for third-party financing can be extended to as long as 30 years. Fixed rates as well as adjustable rates are available; but be prepared for a higher rate on adjustable-rate mortgages.
Most buyers take financing for granted, but their real estate agents do not. Because decent financing is so new to Los Cabos and is still is the exception rather than the rule, advise your real estate agent in the first stages of your home search if you will be financing. Once an offer is accepted, many buyers, including cash buyers, feel as though they’ve been transformed into whirling dervishes. There are several pieces of documentation that need to be submitted in a very short period of time. If the deal is being financed, the number of required documents escalates exponentially. If the offer was made contingent on obtaining financing, the anxiety escalates as well. Whenever it is at all possible, real estate agents prefer their client to be prequalified for the loan. In addition to increasing a buyer’s unease, any contingency makes an offer weaker. With the confidence that the funding is available, you and your agent are free to negotiate from a stronger position.
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Who Else Qualifies?
At present, mortgage lending is limited to residents of the United States and Canada. For a brief period last year, Deutsche Bank was offering financing to citizens of the United Kingdom; that program has been suspended indefinitely.
Nevertheless, a much larger pool of loan candidates has recently been created: those who already own property in Los Cabos. Known as Cash-Out Financing, this program is similar to the home equity loan. In this process, the home is appraised and the owner is offered up to 80 percent of the value as a loan secured by the property. |
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These loans generally take a bit longer to arrange in Los Cabos than what you may have experienced with a home equity loan since the property appraisal process is significantly slower here than in the United States.
Another point to keep in mind when considering cross-border financing is that the closing costs may be slightly higher than for a cash deal. In Los Cabos, cash buyers can expect to pay four to seven percent of the purchase price in closing costs and taxes, including but not limited to the two percent federal acquisition tax and various municipal taxes. With third-party mortgage closings, an additional legal document must be created: the Fideicomiso de Guarantía, which protects the bank’s interests should the borrower default on his or her payments. The borrower pays for the document’s creation as well as loan-origination fees and commissions to the broker. Considering the higher costs, it is a good idea to shop around before committing to a program. The latest trend in financing is vertical integration: Many mortgage brokers are forming alliances with title and closing companies, which should not only expedite their transactions but reduce some of the costs involved.
When Your Dream Works
If you’ve ever thought you’d love to make a second career by opening a romantic bed-and-breakfast, it is now doable. Maybe your idea of heaven would be running your own restaurant in a tropical paradise or creating the perfect bar. Do you scuba? How does having your own dive shop sound? These are just a few of the commercial opportunities available if you’re one of those people who thinks two weeks of vacation in Cabo just isn’t enough. Lucky for you, there is now limited commercial lending for U.S. and Canadian citizens living in México. This funding is newer, and rarer, than residential mortgage funding, and only a few mortgage brokers offer commercial loans. Your real estate agent, though, should be able to introduce you to at least one who does. Because there are fewer lenders, their terms are much more restrictive. In general, mortgage brokers look favorably on established businesses with proven track records. The proprietors should as a rule own the property on which the business stands. The property will serve as the collateral for the loan. Some sellers will also consider financing owners with a substantial down payment. Fifty percent is the expected deposit for seller carryback of a commercial property.
Investing in residential real estate is now a more inviting option than ever. The yield projected by some experts can be as high as a 45 percent return on your investment, much better than the performance of most alternative investment vehicles. Here in Los Cabos, there are two options: long-term rental property similar to investment property in your home country and short-term vacation rental houses. The mortgage bankers have programs for investment properties, with some lenders allowing a single investor to take out as many as four loans. As with commercial loans, not every company offers this option. In fact, some loan programs forbid the rental of a mortgaged home; the banks, though, admit there are no “rental police.” It is imperative to prequalify if you are using the property as an investment since it is often more difficult to qualify for these loans. U.S. citizens should consult a tax professional as it may be possible to finance the down payment on a rental home using funds from an Individual Retirement Account (IRA). Experienced clients who have used this technique know that certain restrictions apply and that the IRA documents should be prepared in advance.
Construction loans are also becoming more common in Los Cabos. These loans, as the name implies, provide the property owner with the means to build a home on it. Sometimes the land itself is considered the down payment. The mortgage lender becomes a sort of project supervisor, with funds released to the builder only when certain benchmarks are achieved. This allows the borrower the confidence of knowing someone familiar with construction costs is watching out for his or her interests. Upon completion of the home, the loan converts to a conventional home loan with a term as long as 30 years.
With the Mexican peso at a historic low versus the U.S. dollar, there has never been a more advantageous time to buy a home in México. Although the prices are in dollars, the peso’s weakness provides administrative savings for buyers now and significant tax savings when they eventually sell the property. Your real estate agent can explain the implications of exchange rate fluctuations in detail, but the short version is that when the peso falls the effect benefits buyers and when it is strong sellers are favored. This global economic phenomenon and the concurrent availability of affordable, reliable financing have made Los Cabos the perfect buyer’s market. This is the time to invest in yourself by purchasing a vacation or retirement home here in Baja. Take it from the hundreds who have already done it: The rewards go far beyond financial gain.
Carol Billups is broker/owner of Realty Executives Los Cabos. She is active in the Los Cabos real estate market and frequently writes about it. She was recently awarded the Circle of Excellence award by Realty Executives International for best business practices.
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Copyright © 2010 - Joseph A. Tyson - All Rights Reserved - www.loscabosmagazine.com
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Cabo San Lucas, Baja California Sur, Mexico - Last Revision - June 1, 2009 - MKS
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