How to Finance Foreign Real Estate

If you are in the market to buy real estate abroad, chances are you won’t be able to secure a local mortgage to finance the property. Even in places where mortgage lending exists, the terms may be far less favorable than you would typically find at home. Depending on the country, you could pay a higher interest rate and a much larger down payment—30%, 40%, or even 50% of the property’s value. Also, you might be required to take out a life insurance policy for the mortgage amount, naming the bank as the beneficiary. Depending on the country—and how old you are—this could be a deal-breaker since insurers in some countries place upper age limits on who can take out a life insurance policy. 

Since mortgages generally aren’t available to U.S. buyers overseas—and most U.S. banks won’t lend for purchases abroad—what are some alternatives if you want to buy a home in a foreign country? Here, we look at three ways to finance your foreign real estate purchase.

Cash

They say cash is king, and this can certainly be true when buying property abroad. Not only will you be able to close the deal faster, but you will also likely get the best price through discounts or upgrades—or both.

In general, paying cash is recommended only if the property in question is already built—and not in the pre-construction stage. If you pay cash upfront for something that’s not built yet, there is always the risk that the developer might run out of money or have some other problem that would delay or prevent project completion. In these situations, it could be challenging, or at least time-consuming, to get your money back. 

Developer Financing

Depending on the country, you may qualify for developer financing if you purchase a lot, home site, or pre-construction property in a development. Developer financing typically involves little paperwork, and there are no age restrictions or life insurance requirements. Another perk is that sometimes, developer financing is interest-free.

With one type of developer financing, you make payments on fixed dates, such as 10% when you sign the purchase agreement, 10% after six months, another 10% after 12 months, and the balance when the project is complete. Rather than fixed dates, another arrangement has you make payments according to construction stages, such a paying 10% down, 20% when the foundation is complete, 20% after the first floor is complete, etc. With another type of developer financing, you make regular payments each month. If you purchase a $50,000 lot in Costa Rica, for example, you might pay something like $1,200 each month for four years, depending on the interest rate, if applicable.

Self-Directed IRA

If you have your sights set on a house overseas and plan on using it solely as a rental or investment property, you may be able to use funds from your self-directed IRA to make the purchase. The IRS does not specify which types of investments are allowed in a self-directed IRA and only states what is not, including collectibles (e.g., artwork, stamps, and antiques), certain coins, and life insurance.

Unlike traditional IRAs, wherein investment options are typically limited to stocks, bonds, and mutual funds, funds from a self-directed IRA can be invested in a broader set of assets, including real estate—either at home or abroad. Because the property must be treated as a real estate investment, you won’t be able to live in the home until you are old enough to start receiving distributions from the account. You can’t use it for vacations either, and if you try to circumvent the law by renting it to yourself, the IRS will not be happy. While waiting for retirement, however, you can use your self-directed IRA funds to pay for the property and any expenses related to maintenance.

Tax laws are complicated and change periodically. It’s always a good idea to work with a qualified tax specialist and/or real estate attorney to ensure you understand both the risks and implications of investing in foreign real estate with your self-directed IRA.

Rules, Laws, and Extra Fees

If you buy land abroad, keep in mind that transaction costs may add quite a bit to the overall cost of the property. One of the more considerable fees is a transfer fee or stamp duty: a tax levied by many countries that can add more than 10% to the sales price. You might also pay an attorney, notary, and registration fees, plus your share of the real estate agent’s commission.

Before buying any property overseas, it’s important to check the local laws to ensure you are even allowed to buy real estate. Even if you can buy real estate in a specific country, there might be limitations on the type(s) of property foreigners can buy. In the Philippines, for example, you can buy a unit in a condominium project—as long as 60% of the units are owned by Filipinos. Foreigners, however, generally aren’t able to own a house or land.

There may also be rules regarding what happens if you want to sell the property. In Malaysia, for example, foreigners are welcome to buy property, but if they ever sell it, the money has to be kept in a Malaysian bank account.

Reverse Mortgage

A reverse mortgage can be a good way for seniors to access equity invested in a home, but the rules and regulations can vary based on your geography. With a reverse mortgage, a homeowner who is age 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, a fixed monthly payment, or a line of credit.

For example, reverse mortgages are available in both the U.S. and Canada—with some small differences in how these work in the two countries. Canada’s age limit for a reverse mortgage is 55, whereas it’s 62 in the U.S. Canada allows you to borrow up to 55% of your home’s value, whereas in the U.S., the maximum amount that you can borrow depends on the age of the youngest borrower as well as interest rates. If you think you may want a reverse mortgage in the future, check the local laws.

The Bottom Line

When purchasing a home overseas, it is of the utmost importance to ensure the transaction is conducted in a manner that will protect your property rights. In the United States, homebuyers receive title to the property; however, this distinction is not as clear in every country. Consulting a qualified real estate professional and an attorney will help ensure that the process goes as smoothly as possible, your property rights are protected, and all necessary paperwork is completed.