DSCR vs. No DSCR Loan: What's the Difference?
If you’ve tried acquiring financing for your investment purchase but can’t get a conventional loan or other solution, like a conventional loan, you...
Many foreign nationals assume that they can’t invest in U.S. real estate as it would be next to impossible for them to qualify for a mortgage loan. However, that’s not necessarily the case. Foreign national loans could provide a solution for non-U.S. citizens looking to invest in the U.S. real estate market.
A foreign national loan is a type of loan that’s provided to foreign nationals who are not citizens or residents of the United States. This type of loan is provided by banks and private lenders to foreign nationals who qualify. Note that these loans often come with different qualification requirements compared to other types of loans since they are not federally backed.
A foreign national loan is designed for non-U.S. residents who are looking to purchase U.S. real estate. It can be challenging for foreign nationals to obtain a traditional mortgage as they often require permanent resident status and U.S. tax documentation.
For example, loans may require you to have two years of income tax returns. These returns are exclusively American documents that come from the Internal Revenue Service (IRS). As such, foreigners usually do not have them unless they already have business interests in the United States.
Non-U.S. citizens who are residents of the U.S. in the country on a work visa or a green card may be able to qualify for federally-backed loans. So if you’re a current legal resident, there may be loan options available to you other than a foreign national loan.
A foreign national loan can be used to purchase any type of investment property in the United States. For example, it can be used to purchase a residential investment property wherein the investor can rent out the property on a short-term or long-term basis. They can even use the property as a vacation home if they plan on visiting the United States on a regular basis.
It can also be used to purchase a commercial investment property wherein the investor rents out the property to businesses rather than individuals. Some different types of commercial properties include office parks, shopping malls, and apartment buildings.
Finally, a foreign national loan can be used to purchase and develop raw land into either a residential or commercial property.
Now that we’ve discussed the basics of foreign national loans, here are five things you need to know about them:
For starters, foreign national loans can only be used to purchase investment properties. The foreign investor is not allowed to move to the United States and live at the property in question.
Instead, they must be able to show that they’re living in another country and earning income in that country rather than in the United States.
Foreign national loans also come with higher interest rates compared to other types of loans. This is because these loans are not backed by Fannie Mae and Freddie Mac and are, therefore, considered non-conforming loans. As foreign national loans are not backed by federal entities, lenders are taking on 100% of the risk.
And since lenders are taking on 100% of the risk, they are going to charge higher interest rates to help mitigate some of that risk. While different lenders will offer different interest rates for foreign national loans, rates are usually somewhere around 7%. This is about 4% higher than the average interest rate for a fixed-rate conventional mortgage in 2021.
Since foreign national loans are not backed by the government, they also require larger down payments. For example, conforming conventional loans require a minimum down payment of 3%, whereas FHA loans require a minimum down payment of 3.5%. Foreign national loans, on the other hand, require a minimum down payment of 25%.
If a foreign national purchases property in the United States, they will be subject to a number of different taxes. For starters, they will be required to pay property taxes that are based on the value of the property.
The percentage of tax levied depends on the state and county, with rates ranging from 0.32% to 2.31% but averaging around 1%. So if a property is worth $500,000, the property taxes will amount to $5,000 a year or about $416 a month.
They will also be required to pay capital gains taxes in the event that the property is sold for a profit. The IRS will automatically withhold 10% of the property’s gross purchase price to cover capital gains taxes before adjusting it after taxes are filed.
Foreign national loans come with different documentation and qualification requirements compared to other types of loans. For many other types of loans, the borrower is required to provide income tax returns during the pre-approval and application processes to verify their income.
However, since foreign nationals may not have such documentation, lenders have other ways to verify their income. The exact requirements and process vary by lender, but many ask for things like bank statements, employer verification letters, and/or accountant letters.
It can be more challenging to qualify for a foreign national loan due to the risk they present to lenders. Lenders often have strict requirements in place that foreign nationals must meet in order to qualify for a loan.
Although specific qualifications vary by lender, here’s some information to help you know what to expect:
It can also be challenging to find a foreign national loan since they aren’t always offered by traditional lenders. And even if they are offered by a traditional lender like a big bank, they often come with strict qualification requirements and little to no flexibility. Instead of getting a foreign national loan from a big bank, you may want to consider a private lender with more flexibility.
Private lenders have more flexibility to set their own requirements and work with foreign investors to meet their financing needs. For example, Vaster is a private lender backed by the Fortune International Group and the Related Group.
Vaster was founded in 2017 as a lender for residential properties, commercial properties, and land for development.
Since we’re a private lender, we have the ability to finance real estate transactions in a quick and flexible manner using our own criteria to consider loan applications. For example, we highly consider the value of the properties we seek to finance rather than solely the financial history of the borrower.
This comes in handy for foreign investors who are looking to take advantage of hot U.S. real estate markets. Look at Florida, for example. Foreign buyers spent $15.6 billion on existing single-family and condominiums in Florida from August 2019 to July 2020.
This accounts for 11% of Florida real estate sales total dollar volume. Furthermore, foreign buyers made up 8% of Florida’s existing home sales compared to just 3% of national home sales.
As the world and domestic economies continue to recover from the COVID-19 pandemic, more foreign investors will be driven to buy properties in the United States either for investment purposes or for personal purposes. Now is definitely the right time for foreign nationals to invest in properties in the United States before interest rates and prices increase any further.
So if you’ve decided that foreign national loans are the right option for you based on what you’ve learned thus far, here’s what you need to do to move forward with the process:
So if you’re a foreign national looking to take advantage of hot real estate markets in places like South Florida, Vaster is here to help.
Reach out to our lending experts today to learn more and get started.
Sources:
What Foreign Buyers of US Real Estate Need to Know | Investopedia
What Is a Foreign National Loan? Way to Buy Investment Property | Realtor
Global Investors Drive Miami Real Estate Market | South Florida Business Journal
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