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How to Finance your Baja Real Estate Purchase
Buyers looking to purchase a property in the coastal region of Baja, Mexico, in today’s market, finance the purchase of a property in a number of different ways. Buyer cash on hand is the most common way. Bank financing is less common but still happening, and seller financing is a nice option when it exists. Below, we will give you a broad picture, an introduction to this financing when considering buying a property.
If you are an owner who plans on selling a property in the Rosarito, Ensenada, or Tijuana area, you might receive an offer with one of the described circumstances below. If you are a buyer, you will have some ideas on how to finance a real estate purchase.
First, understand the majority of sellers of coastal real estate in this Baja region advertise property sale prices in US dollars and want to be paid in US dollars, even though the official currency of the country of Mexico is the peso. I could say with a high level of confidence, about 99% of sellers in this unique market want the proceeds of the sale of their property in US dollars even though the peso has strengthened considerably since 2023 and still has a strong outlook.
Cash to Purchase
Cash still is the most common way for a buyer to finance the purchase of a property and has been since I entered the market back in 1995. Most buyers today have cash or stock that cover the agreed upon sales price plus closing costs and search for property and make offers for properties within their cash position. It is very common for a buyer to have in their written Offer to Purchase that the Buyer can show the Seller proof of funds to the purchase plus costs within 2 days of an accepted offer. All monies are usually paid through escrow and delivered by wire transfer.
Equity from a Different Property
One contingency concerning financing and cash that comes up on occasion is that the Buyer must sell a property in the US to finance the purchase of property in Baja. This is unique and might be acceptable to a seller of a property in Baja because a transaction in the US generally takes about 60 days less time than a transaction in Baja when bank trusts, fideicomisos, are involved. US transactions take about 30 days while bank trust transactions in Baja take about 90 days. In this case the Buyer of the property in Baja would show proof of equity and proof of a qualified buyer for the US property in lieu of or as part of showing cash to purchase. If this type of contingency is accepted, the Buyer would still have to have enough cash on hand to deliver the good faith deposit, earnest money, into escrow, and for initial closing costs for the property in Baja.
Bank Financing from the US in US Dollars
Back in the early 2000’s, A few US Lender’s entered the Mexican financing market and started to offer loans in US dollars with the subject Mexican property being used as the collateral. This initial stage of US side financing has dried up. 2008 and forward, the Baja real estate market became so challenged that hopes of this type of financing seemed like it would not come back.
However, a cycle later, a decade later, given the surge in real estate in Mexico from about 2017 and forward, there have been new lenders and brokers interested. Either do an online search to see which lenders might be available to or get a recommendation from a friend or real estate agent.
Know the terms of their loan programs in full before you start shopping for properties. Get a commitment letter from them to lend you funds as well. In the loan approval process, I have learned of a lender request information that not even a seller could find in their title, was not in the public registry, and laboriously slowed down the closing process, in which canceling the transaction was an easy option.
Even though these lenders may be from the USA and loans may be in US dollars, interest rates and closing costs may be several points higher than what you would pay for a principal residence in the USA, but may not be far off from financing terms if the property was your second or third USA home or an investment property in the USA.
Minimum acceptable property values may be $250,000 or $350,000 US dollars, with a minimum of 35% down, may apply. Do some shopping.
Learn up front if the lender is going to immediately sell the loan to a bank in Mexico and if yes, what difference will that make. Ask the loan officer if this type of loan would show up on your US credit report, even it the loan is sold to a Mexican bank.
Another approach to US dollar financing to purchase a property in Mexico, which will also get you the best interest rate and less red tape, is to get a home equity line of credit on your US stateside home. If you qualify for one, show this prequalification letter, or even better, a commitment letter, to your Baja real estate agent and/or the seller of the property in Baja. This works.
Bank Financing in Mexico in Pesos
Some Mexican banks are offering loans to US citizens or non-Mexicans, but you may need a Mexican Resident Card. These loans would be in pesos and the terms of the loan would be similar to what a Mexican national borrower may pay in the open market.
Qualifying may include stronger US side credit scores, proof of aged income, and the amount of initial equity in the subject Mexican property.
Approach the large banks such as BBVA, Santander, Banamex and Banorte to start shopping. The paperwork is tedious and time consuming. These loans are not cheap and usually more expensive
than getting a loan in US dollars. As a borrower, you may have to pay value added taxes, IVA, on the interest you pay, and you may have the additional requirement and cost of getting personal insurances, life insurance in Mexico, for example.
Since the borrower would get financing in pesos, it leaves a problem to solve as the seller will most likely want to be paid in dollars. Given that the pesos to dollar exchange rate fluctuates, it may be a part of the negotiations that the buyer would upfront a certain amount of US dollars into the escrow account to cover peso exchange rate differences to complete the agreed upon sales price in US dollars. Any amount of this money not used to complete the sales price is returned to the Buyer.
Borrowing from a Family Member or Friend
Some buyers simply have a family member lend them or give them money to purchase real estate in Baja. This may be fine, but it has to be disclosed to everyone. The seller is going to want proof of funds in the buyer’s name and not someone else’s. The closing coordinator or
notario will want the money to purchase to the property to come directly from the buyer’s personal bank account and not a business account or someone else’s bank account given money laundering circumstances. Ask the closing coordinator or notario about options and how this can be handled.
On a side note: if it is a private loan from a friend or family member, the person lending can still be named as the first lien holder of the property right inside the buyer’s bank trust or property title protecting the lender’s interest.
Seller Financing
Seller financing is by far the best option if you need financing and if the seller is willing to extend financing to you. The benefits include a low amount of paperwork, a short to no loan qualification process, less costly loan recording costs, less loan initiation costs and drafting of the loan, maybe a lower interest rate than institutional lenders, and working with a seller face to face. Seller financing will not show up on your US credit report. The subject property will be used as collateral to protect the seller, and the seller will most likely be in first position in the buyer’s bank trust or title, so the buyer could not a loan in front of the seller’s terms.
The problem with seller financing is that is usually not wanted by sellers. But every once in a while, someone will be open to it. It is a great tool used by sellers in the past if the market is down for example and they wanted to convert a buyer into an owner. It is also a great option for a seller who does not need the proceeds from the sale and does not want to rent out the property.
With seller financing, it is highly recommended to close on the property, meaning that the buyer gets title, and the loan in favor of the seller, and the terms of the loan are described in the bank trust. This is the best way to protect both parties. It is not recommended to do a land sale type of seller financing, in which the seller does not give title until the buyer pays in full. Mexican laws do not look favorable on this method. This is the common method of land sales in fraccionamientos, but it is not recommendable for everyone.
In Search of Financing
Buyers should note that most sellers don’t want to receive offers out of the blue in which the buyer is asking for seller financing. If you are a buyer and are looking for any kind of financing, make sure your agent knows this upfront.