“How can I finance a property overseas?” is the most popular question among people that have an interest in buying a property overseas. With interest rates so low across the United States and Canada, buyers are very accustomed to use leverage to buy a property. It is thus natural for them to seek a similar debt when they look outside of their own country.
But does that apply to a foreign market?
The default answer to that question is:
It is not possible to get a mortgage for a property that you buy in a foreign country
Using a bank in your home country
A bank or a private lender doesn’t have the resources or willingness to go to the process of taking a mortgage on a property in a foreign country and worse, trying to get the property if you don’t pay. They’ll just never do it. You’d be wasting your time by asking left and right.
There are no exceptions to this case. You might hear somebody say they got a mortgage to buy a property in Mexico. They didn’t. They just took a HELOC on their US property so the bank doesn’t care whether the money is used to buy a property in Mexico or to go on an expensive holiday. The bank’s security is the US home and they get their money back through the US income of their borrower. They’ve basically just refinanced and encumbered their US home. This completely defeats the purpose.
Using a local bank
A local bank or lender won’t lend to you as a foreigner because all your income comes from out of their country and all your assets are out of the country so all they have is the property and they can’t go after your income or assets overseas.
There are exceptions though; certain banks in certain countries will give mortgages to foreigners. Why? Because the rules will be so strict that they risk will be very low and they’ll make a lot of money off you, as their margin loan will be huge because you’ll pay a much higher interest rate than locals for the privilege.
For example in Mexico, you can (in theory) get a mortgage from a Mexican bank to buy a property there but it’s very difficult to qualify. You need to have a pristine file and you can pretty much forget it if you don’t have W2 income. And then, if you qualify, the process is complicated so forget about getting a letter of pre-qualification to take advantage of the deal. If you qualify, forget about getting any conditions close to those in the US or Canada. Forget 30% LTV or less, the maximum LTV will be 50%, for the reasons mentioned above. The term of the loan will be shorter and the interest rate much higher.
To continue with our example of Mexico and despite the expensive mortgage, you can make great investments there but you need a mindset shift. Many US/Canadian investors are so addicted to cheap mortgage financing that they can’t see the forest from the trees. Mexico is normally a cash market for foreigners. Is that such a bad thing? It’d be a better deal to buy a 20% CAP rate property in Mexico with 100% cash than a 5% CAP rate property in the US with 10% cash (moreover, your risk would be lower because you don’t have the debt). So, you could get a great deal in Mexico with an unattractive mortgage because you could still be cash flow positive.
The only other alternative is seller financing. It’s not very common though. The problem with that is that you’d need a motivated seller since it’s a cash market and a motivated seller won’t give you financing because he needs cash!
As you can see, to finance a property overseas, if you would like to use leverage, you need to be prepared to pay the price. While it requires more upfront capital, purchasing a property cash would lower significantly your overall risk.
Checkout our other blog articles on how to finance a property overseas: