2018's rising home prices and strong dollar are making it harder for non-U.S. citizens to pay cash for homes in once-favored cities such as New York, Miami and San Francisco. As a result, more foreign buyers are financing residential real estate. However, non-U.S. citizens must consider a number of factors when applying for a mortgage as well as distinct disadvantages, including additional lender requirements, higher borrowing costs and a more arduous approval process.
No Fannie and Freddie
Since mortgage giants Fannie Mae and Freddie Mac – which own or guarantee the majority of American home loans – won’t purchases non-U.S. citizen loans from mortgage lenders, lenders have to keep these mortgages on their own books. In addition to not being able to easily sell these loans on the secondary market, the loans are less attractive because it’s more difficult to track down delinquent borrowers overseas.
Many banks, including some big-name institutions, will lend to foreign nationals who live outside the U.S. but instead of relying on conventional mortgages, they offer nonconforming loans with their own underwriting guidelines and often a higher interest rate.
A Bigger Down Payment
Since foreign buyers are a higher credit risk, lenders ask for a much higher minimum down payment. Lenders typically ask foreign buyers for a down payment of 30% or more of the sale price before extending a loan.
A Tougher Approval Process
Income and credit verification is more complicated for non-U.S. citizens without American tax returns or a domestic credit history. Lenders will usually ask for bank statements and tax returns filed in the applicant’s home country. In lieu of a credit report, they may require several months’ worth of credit card statements to probe borrowing habits.
It Takes Longer
The mortgage approval process can take quite a bit longer for non-U.S. citizens. To speed up the underwriting process, apply for a mortgage at a global bank that has a presence in your home country as well as the U.S. In some cases you may also qualify for a lower interest rate.
A Green Card or Work Visa Gives You More Options
If you are either working legally in the United States, even on a temporary work visa, or a permanent resident with a green card, you can qualify for Fannie Mae or FHA loans. You may need to supply additional information to the lender to prove your status or that your work visa will be extended.
Taxes Will Be a Concern
As a foreign buyer, consider tax laws of more than one country. Different countries have different tax treaties with the U.S. When you sell, you'll be subject to U.S. capital gains taxes and the U.S. Internal Revenue Service (IRS) will automatically withhold 10% of the gross purchase price and then adjust accordingly when you file your U.S. tax return.
Given the hurdles involved with getting a loan, 47% of foreign buyers decide to pay cash for residential properties according to a 2016 report from the National Association of Realtors (NAR). However, if that's not possible, consider buying property in more affordable parts of the U.S. where you can pay cash.