Financing is now available through Mexican banks and now with US banks too. US banks have traditionally been reluctant to provide mortgage financing on Mexican property due to the inability to obtain title and potential difficulties with foreclosing in a foreign country. Purchases were limited to investors only with sufficient resources to buy real estate and had no need for financing. Recently, this situation has changed dramatically and it seems there are more and more mortgage companies coming to Mexico.

The Bank Trust(Fideicomiso) has become sufficient collateral and a simple notation is made on the trust document to protect the lender (if buying in the interior a lien is placed on the property, much like in the US).

Everyday more and more lenders are realizing that their investment in Mexico is a safe investment. The introduction of mortgage capital shows a vote of confidence in Mexican real estate.

Financial History of México

Because of the historic instability of the Mexican peso, Mexican real estate mortgages, in the past, have been prohibitively expensive and volatile. Adjustable rate mortgages in Mexico were the only option. And without rate caps, the borrower had little protection against excessive interest rate adjustments.
In 1994, when the peso lost 50% of value, interest rates went through the roof. Developers were hardest hit. Unable to pay the interest increases on construction loans, a huge number of developers and projects folded.
A better day for financing property purchase has dawned in Mexico. Improved governmental accounting practices, a more transparent federal budgeting process and stricter lending policies, have all helped the peso become a stable currency.
Today, Mexican banks offer twenty year fixed rate mortgages at 90% of value with an interest rate of 12% in pesos. This may sound expensive to U.S. borrowers, but to millions of Mexicans this is a historic “first time” affordable rate. A fixed rate that will not drive them to the poor house in case of peso devaluation.

Basic TAX information.

In the United States, American citizens may exclude the capital gain they realize when they sell their principal residence after occupying it for a period of not less then two years during the five years preceding the sale and meeting other specific IRS requirements. There is no federal income tax liability on up to $250,000 gain in U.S. dollars ($500,000 gain for joint filers) on the sale of their primary residence.
Mexico has a similar provision in its tax code for primary residences--even for U.S. citizens. The Mexico Tax Revenue Code (Codigo Fiscal de La Federacion), states that Mexican nationals and foreign owners of a home in Mexico may be entitled to certain tax exemptions on the capital gain realized if the home is a primary residence. In fact, Mexico has no ceiling on the gain rendered by the sale of a primary residence, but U.S. citizens must stay within the $250,000-$500,000 limits, regardless of where their primary home is located.
The issue of capital gains tax has long been a troubling problem for many foreign purchasers of residential property in Mexico whether it is used as a residence or investment. Many sellers, whether Mexican or foreign, have tried to reduce their tax liability on the sale of a residence by using a lower "declared value" in the transaction rather than using the actual sales price. As a result, unknowing buyers can inherit additional tax consequences when they ultimately sell the home in question because their "basis" in the property is less than what they actually paid. For several years now, some real estate agents in Mexico have advised their non-Mexican clients not to worry about capital gains taxes because they would qualify for an exemption. They often advised the prospective buyer that he or she would be able to demonstrate to the local public notary (notario publico), who is responsible for the collection and payment of the capital gains tax, that the residence was their primary residence and therefore they qualify for the exemption. At the very least, this was misleading and poor advice to receive from a seller or real estate agent. At its worst, it could be considered tax fraud.
According to recent amendments of the Mexico Tax Revenue Code, a foreign national who is a "homeowner" may qualify as a "resident" of Mexico for Mexican tax purposes and may qualify for a capital gains tax exemption on the sale of residential property in Mexico. The following are some points to consider to determine whether you qualify as a Mexican resident:

• Is your primary residence in Mexico?

• Is more than 50 percent of your total income generated or earned in Mexico?

• Is your main business operation or your main professional center for business income purposes located in Mexican Territory?

If you have answered "yes" to these questions, you may be considered a Mexican resident and may be entitled to some residency benefits such as the capital gains tax exemption. You should always contact a local notario publico to discuss the specific requirements and benefits of Mexican residency. You should also consult with other Mexican legal counsel and tax advisors to explore these and other possible benefits. American and other foreign buyers of Mexican residential property must be aware of Mexico's capital gains tax liability when they sell. If the original seller did not declare the total purchase price when selling the property, the buyer could face increased capital gains tax liability when the buyer sells the property because of the artificially reduced basis as discussed earlier It is not uncommon for this consequence to be a "deal killer" when the buyer seeks to sell the property and discovers that he or she must write a check just to cover the income tax due at the pending sale. Obviously, the simple solution to this problem is to declare the actual purchase price in the sale of all real estate. Always consult with legal counsel and a tax advisor to make sure you understand the property's basis and tax ramifications.

Capital gains capsule

When property changes hands and capital gains taxes are due, the notario withholds a certain percentage of the gains according to a formula, on behalf of the seller. The seller pays the remaining portion of the capital gains when he or she files their annual tax return in Mexico. How capital gains are calculated on the sale of property in Mexico involves a complicated, confusing method. Two of the main factors are that the cost basis of the property in Mexico is adjusted for inflation and second, as mentioned above, the price used to calculate the tax is not necessarily the sale price. Let us assume that you bought a condo two years ago at $100,000 and then sold it at the end of the second year. Inflation during that period was 15 percent for the first year and 10 percent for the second year. The price of the home would be adjusted to $115,000 the first year and then $126,500 for the second year. A second difference of note is that the price used to figure out the sale of the property is not necessarily what the property was sold for, as in the United States. Remember, unlike the States, many people in Mexico use the appraised value or the municipal assessed value as the sales price, even though the property may have been sold for a different amount. Obviously, you may want to use the lower figure, depending upon your buy-sell circumstances, but be certain your notario understands your request. In the end, however, Mexican capital gains tax on investment real estate is not expensive as in the United States. In any case, the net result is that in Mexico the seller will pay substantially less capital gains on real estate transactions.

FINANCING OPTIONS

Traditionally, Mexico real estate purchases have been limited to investors with sufficient resources to buy real estate without need for financing. Unfortunately, not everyone can afford to pay cash for property in Mexico. So now that you've found your dream home - how are you going to pay for it? Fortunately, there are now several US-based mortgage companies that offer financing to qualified buyers who want to purchase properties in Mexico.

Real estate financing is a relatively new phenomenon in Mexico that extends the possibility of owning a home in Mexico to many who could not otherwise afford it. In the past, North American banks were reluctant to provide mortgage financing on Mexican properties due to the foreign investors' inability to obtain title to real estate within 50 kilometers of Mexico's coastline, which is where most foreign investors choose to buy property in Mexico.

To circumvent this limitation, the Mexican Government implemented a system whereby Mexican banks acquire the property and place it in trust for the sole use and enjoyment of the foreign property owner, or "beneficiary." The trust, called a "Fideicomiso," assures the foreign buyer of all the rights and privileges of Mexico property ownership, including the right to remodel, lease, mortgage, or sell the property at any time.

Terms of the trust usually extend to 50 years, renewable in 50 year increments, which allows the buyer to bequeath the property to an heir. Due to these changes, there are now several American mortgage firms that offer financing for values up to 80% of the property's appraised value.

US-based mortgage lenders want a higher standard of assurance that the loans they originate are secure and that the public deeds vesting the bank's lien interest are in fact valid and enforceable. In order to finance Mexican residential properties, there must be a transfer and conveyance to a Mexican bank trust registered by a Notario Publico, which establishes a recorded and renewable 50 year beneficiary interest for the non-Mexican buyer. A simple notation is made on the Mexican trust to protect the lender and provide the lender with sufficient collateral for mortgage financing.