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.
What Is a Foreign National Loan?
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.
Why Would You Need a Foreign National Loan?
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.
What Can a Foreign National Loan Be Used For?
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.
1. Foreign National Loans Can Only Be Used for Investment Properties
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.
2. Foreign National Loans May Come With Higher Interest Rates
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.
3. Foreign National Loans Require a Larger Down Payment
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%.
4. Foreign National Loans Come With Tax Implications
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.
5. Foreign National Loans Have Different Documentation and Qualification Requirements
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.
How To Qualify for a Foreign National Loan?
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:
The maximum loan-to-value (LTV) ratio for a foreign national loan is usually around 70% — meaning that the amount borrowed divided by the appraised value of the home is less than 70%. This means that for a property worth $500,000, the maximum loan amount is $350,000.
The maximum debt-to-income (DTI) ratio for a foreign national loan is usually around 30%. This means that any monthly debt payments divided by the monthly gross income is less than 30%. So, for someone who makes $10,000 a month in gross income, monthly debts (including mortgage payments) must not be more than $3,000.
The foreign borrower must be able to cover the cost of the down payment of the loan on their own merit and are not allowed to use gift funds, unlike domestic borrowers. Lenders may use bank statements to verify the source of the down payment funding.
How To Find a Foreign National Loan
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.
How To Apply for a Foreign National Loan?
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:
Find potential lenders. To begin the process, you need to find potential lenders that offer foreign national loan products that you qualify for. Make sure that these are reputable lenders with extensive lending experience and positive customer reviews.
Gather documentation. Before you move forward, it’s always helpful to start gathering the documentation for your application. Reach out to the different lenders you’re considering to see what they need, as different lenders may require different things.
Shop around for the best rates and terms. Speak with several different lenders to get multiple quotes so that you can choose the best and lowest interest rate. Keep in mind that seemingly small differences in interest rates can translate into saving thousands of dollars in interest over the term of the loan.
Find a property. With pre-approvals in hand, you can start looking for potential investment properties that meet your needs and goals.
Purchase the property. When you’ve found the perfect property, you can submit a competitive offer that’s hopefully accepted by the seller.
Finalize the loan. Once your offer has been accepted, it’s time to close on the loan by going through underwriting, property appraisal, property inspection, and title search.
The Final Rundown on Foreign National Loans
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.