In the wake of the housing crisis, conditions seemed just right for foreign buyers hoping to gobble up prime U.S. real estate. Homes were selling at attractive prices, and the dollar was relatively affordable. However, over the past few years, things have gotten tougher for overseas investors. Residential real estate prices are up nationwide around 35% since 2012, and the dollar continues to gain strength against a number of key currencies, further increasing the price foreigners have to pay up for U.S. homes.
Those factors are making it harder for outsiders to put up the cash for homes in once-favored cities such as New York and San Francisco. As the Wall Street Journal recently reported, more foreigners are looking to take out loans on these properties, despite the challenges that come with borrowing from U.S. banks. (For more, see Why New York Luxury Real Estate Has Had a Bad Year.)
For non-U.S. residents looking to own an investment home, there are a number of factors to consider if they're considering a mortgage
1. No Fannie and Freddie. The biggest hurdle is that mortgage giants such as Fannie Mae and Freddie Mac won’t buy their loans from the lender. As these entities own or guarantee the majority of American home loans, that puts investors in a pinch. To further complicate matters, many banks are wary of keeping such mortgages on their own books, because it’s more difficult to track down delinquent borrowers overseas.
2. Higher-priced mortgages. Many banks, including some big-name institutions, will lend to foreign nationals who live outside the U.S. Instead of relying on conventional mortgages, they offer nonconforming loans with their own underwriting guidelines. For example, HSBC offers up to $3 million of financing to international investors with the requisite documentation.
3. A bigger down payment. But here’s the kicker: You’ll likely have to pay a much higher minimum down payment to make up for your higher credit risk. Lenders typically ask you to put up 30% or more of the sale price before extending a loan. While that’s a lot of cash to put up front, it’s a lot easier than paying all cash, which is what roughly half of foreign real estate buyers do.
4. A tougher approval process. Another aspect that’s different for non-U.S. citizens is the income and credit verification. The process is more complicated for those who live outside the country, as they don’t have American tax forms 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’ll sometimes request several months’ worth of credit card statements to probe your borrowing habits.
5. It takes longer. The process can take quite a bit longer than residents would face, which is one of the reasons why it makes sense to apply through a bank that has a presence in both your home country as well as the U.S. Doing so can not only speed up the underwriting process but in some cases also result in more favorable rates than foreigners would otherwise see.
6. Cheaper All-Cash Alternatives. Given the hurdles involved with getting a loan, plenty of overseas investors decide to pay cash for residential properties. But with prices creeping up, more of them are starting to look at more affordable parts of the country.
Overseas investors bought $102.6 billion of U.S. residential real estate between April 2015 and March of 2016, a drop of just over 1% from the prior year, according to the National Association of Realtors. Yet the number of properties they purchased actually increased about 3% over that same period, indicating that they’re scooping up less pricey homes.
While New York and California remain popular spots for buying a home – together they account for 19% of overseas transactions – more activity is taking place where the properties are cheaper. In 2015, Florida accounted for 22% of sales to foreign buyers, while Texas and Arizona comprised 10% and 4%, respectively. (For more, see New York City Real Estate: A Safe Haven?)
As the stock market continues to falter, nonresident foreign nationals continue to see the U.S. real estate market as a great place to park their money. However, now that prices are on the rise and the dollar remains strong, more of them need to get financing to snag the most attractive properties.