Financing in Mexico: The Rules Have Changed

In the past, there was a tendency for lenders to make loans in Mexico as if they were making a loan in the U.S., i.e., a first-mortgage loan with title insurance. However, in order to expedite the foreclosure process if it becomes necessary, Mexico has created a format allowing lenders to more easily and efficiently foreclose by putting the subject property into a trust. In other words, the property is held not by the owner or borrower, but the deed is held in a large bank. As a result, in the event of a default leading to foreclosure, it’s easier to get the property at a foreclosure sale or by other means.

At the same time, it’s less likely there will be title issues as in the past—including borrowers who have claimed that they either didn’t sign the documents, or weren’t permitted to offer the property as collateral. As an example, a valuable lesson was learned on a loan involving a gated townhome development in San Miguel, Mexico. The borrower defaulted, and under previous laws the property was not in a trust. During the foreclosure process, the borrower brought up such claims as that they “did not sign” a particular document, and “this wasn’t our deed to provide as collateral.” The process was eventually completed, but at the cost of a tremendous amount of time. Putting the property in a trust, perfidio commisso, with the bank, essentially eliminates that risk.

There are other factors one should be aware of prior to making a loan in Mexico. Valuation, for one: It is important to hire an independent, reliable appraiser who knows how to judge the value of the property in its present condition or in the case of a construction loan, its worth upon completion. The appraiser should have their finger on the pulse of what’s going on in the immediate area, because while a particular property may look spectacular on paper, the surroundings may not justify that value, for example.

It is important, for a construction loan, to make sure that construction is in accordance with all local laws and regulations, with all necessary permits in place. It is a must to have someone “on the ground,” who at least on a monthly basis makes sure the work is progressing in accordance with the original plan, specs, and budgets provided by the borrower.