HOW TO GET REAL ESTATE FINANCING IN THE USA AS A FOREIGNER?
Investing in real estate in the United States represents an attractive opportunity for foreign investors. However, one of the major concerns is the possibility of obtaining bank financing. I am delighted to welcome you to this new blog post about real estate in the United States. Today, I will give you the first keys to knowing if you can obtain real estate financing as a foreigner in the United States. We will explore together the requirements, the different types of loans available, and the factors that influence the approval of your financing application.
Fundamentals of Real Estate Financing for Foreigners
The first answer I can give you, the overall answer to whether or not you can obtain financing as a foreigner in the United States, is generally yes, of course you can. However, several factors come into play and determine your eligibility as well as the terms of your loan.
Geographical Factors and Property Value
It will depend first of all on the state where you want to invest and the asset in which you want to invest. American financial institutions do not grant loans uniformly across the entire territory.
Banks will not take risks on states, regions, or neighborhoods they consider risky, which have been marked in the past due to too many foreclosures, particularly related to the subprime crisis. This reality directly affects your financing possibilities depending on the location of your investment.
This is particularly the case for many cities under reconstruction, especially in the Midwest states, the Northern states. We can mention cities like Detroit, Saint Louis, Cleveland. In these areas, even if prices may seem attractive, obtaining a loan can be difficult or even impossible.
In neighborhoods where there are many investors investing, you cannot obtain financial borrowing simply because the bank will consider the market too risky. This reluctance is explained by several factors:
- History of payment defaults in the region
- Volatility of real estate prices
- Local economic uncertainty
There is too much heterogeneity in the market and therefore, depending on the comparables that the bank will ask for - because it works with comparables, we'll come back to this later in the blog post - depending on what the bank will ask you, it will see that the sale prices around your property are very different. This disparity makes property valuation more complex and increases the risk perceived by lenders.
Minimum Value of Financeable Properties
Another crucial aspect concerns the value of the property you wish to acquire. The second thing that the bank will not be able to finance are properties or assets that simply have too little value. There is a threshold below which banks are generally not interested in financing a real estate purchase.
The cost for a bank to work on a file is roughly always the same, namely they will employ what is called a mortgage broker, that is, really someone who will be able to give you the terms of the loan. This process involves several professionals and administrative steps.
Also an underwriter, someone who will check your background, verify all the administrative aspects of your file. All this has a fixed cost, whether it's a loan for 500 thousand dollars or for 50,000 dollars, it's the same. Consequently, small amounts are not profitable for financial institutions.
So obviously, properties and assets that are below 100 thousand dollars, generally, the bank will not be able to obtain financing for you and will not follow up on your file. This limitation is important to consider when selecting your potential investments.
The Importance of Local Bankers
It's also important to work in many cases with local bankers who have much more important field knowledge and who will generally give you many more keys because they better understand the market and the risks related to the market. These professionals can guide you towards opportunities that are most suited to your profile and local specificities.
While investing in US real estate as a foreigner offers significant opportunities as discussed in our previous article, many investors are now leveraging social media to showcase their properties and attract potential buyers or renters. Some real estate professionals have begun to buy TikTok views to increase visibility for their property showcase videos. This strategy allows foreign investors to highlight their US real estate acquisitions to a wider audience, potentially attracting more interest from potential tenants or buyers, provided you go through a reliable, reputable agency like Fameways, for example.
Bank Evaluation Criteria for Foreign Investors
The second aspect on which I wanted to give you keys is obviously what the bank will ask a foreign investor to obtain financing. The evaluation criteria differ slightly from those applied to American residents, but are based on similar principles.
Income and Financial Surface
The first thing is that they will of course look at your income. This is something very important. Your ability to repay the loan is the main concern of any lender, regardless of your nationality.
Whether you are an employee or an entrepreneur, it's the same thing, they will look at your income. Banks will examine the stability and regularity of your income to assess your repayment capacity.
The second thing they will look at is your financial surface, the available cash, to simply have a reserve. This cash reserve serves as additional guarantee for the bank, demonstrating that you have a safety net in case of temporary financial difficulties.
And to be able, if you default, to simply see how they will be able to help themselves or that you will be able to intervene to, in case of a problem, simply pay the loan. This additional assurance is particularly important for lenders when dealing with foreign investors.
Professional Status and Documentation
As I wanted to say, there is no issue whether you are employees or entrepreneurs, it's just that the documents to provide to the bank are different, but you can both simply obtain bank financing as a foreigner. The difference mainly lies in the type of documents required to prove your income and financial stability.
Property Evaluation by an Expert
The bank will ask to have an appraiser come. An appraiser, in fact, is a person who is licensed in the state in question, who is actually a specialist in property valuation. This professional evaluation is crucial to determine the real value of the property you wish to acquire.
Generally, he works with a system of comparables, so he looks at properties that are similar to the properties in which you want to invest, the asset in which you want to invest. This comparative evaluation method helps establish an objective market value.
And will simply allow you, at least on residential properties, to be able to obtain a loan. The evaluation serves as a basis for determining the maximum amount that the bank is willing to lend you.
Property Insurance
In parallel, the bank will ask you to insure the property. This is something very important. Insurance protects both your investment and the bank's guarantee against potential damage.
Most insurance companies will ask you to have an inspection done on the property to see if the property is insurable. This inspection helps identify any structural problems or risks that could affect the value or safety of the property.
And so all this will allow you to obtain financing. Once these steps have been successfully completed, you will be able to finalize your loan application.
Interest Rates and Loan Conditions
To give you an idea of the rates you could also obtain, you should know that between Europe and the United States, there is a very big difference in rates. This difference can significantly influence the profitability of your investment.
I will give you an idea of the current average rate dating from November 2020. We were at about 2.87% for a loan for a residence in the United States. These rates fluctuate regularly based on monetary policies and economic conditions.
So on a loan on a residential property, obviously it's much higher than what we can have in Europe, since I know that around the same period, we are around 1% in Europe. This difference is explained by distinct monetary policies and different market structures.
Nevertheless, we are among the lowest rates at the moment in the United States. This is something to take into consideration. From a historical perspective, these rates remain attractive for investors.
Personal Example of Refinancing
I can also give you a personal example on a property I acquired in Florida. Between the time I acquired it, around June 2019, where I had a rate of 4 and a half percent, I refinanced the property a year later because the rates decreased enormously. This refinancing strategy can considerably improve the profitability of your investment.
I obtained a loan rate of 2.6 percent over 30 years. This significant reduction illustrates the importance of staying attentive to developments in the interest rate market.
Duration of Real Estate Loans
So that's the average in the United States. They generally offer a loan over 30 years, which may seem long. This extended duration allows for reducing monthly payments and improving the cash flow of your investment.
You can of course reduce this duration, and in that case, the rate is generally better too. If you borrow over 20 years, over 15 years, the terms will be better. The choice of duration will depend on your investment strategy and financial objectives.
Different Types of Real Estate Financing
Residential vs Commercial Financing
So we're talking about residential loans. You can also, if you are in the case of multi-family, that is, apartment buildings, or also in the case of commercial, that is, the purchase of offices or shops, commercial walls, call on another type of banker who are commercial bankers. These specialists have a different approach to risk assessment and opportunities.
And so there, who will work on other benchmarks, generally it's on the cash flow they will work, on the value despite everything of course of the property. For commercial properties, the property's ability to generate income is often the main evaluation criterion.
Cash Out: A Refinancing Strategy
It allows you to easily have a loan. What is called cash out in the United States is simply that you bought a property in cash. This strategy consists of extracting part of the accumulated value in your real estate property in the form of cash.
So this can be true especially on a portfolio of properties in the markets we mentioned at the beginning of the blog post, especially in more risky markets like Cleveland, like Detroit, like Saint Louis, where you can on a batch of properties then do a cash out. This approach can be particularly useful in markets where initial financing is difficult to obtain.
That is, have you refinanced by the bank that will put a mortgage on your property or on your portfolio of properties. Once you have established a history of ownership and potentially improved the value of the properties, banks may be more willing to grant you a loan.
And in return, you will have a loan and you will take out your cash which you can normally do what you want with unless there is a term in a contract that asks you to reinvest in similar properties. This flexibility allows you to redeploy your capital to other investment opportunities.
Conclusion
To conclude, it's important to know that bank loans are something very important in real estate. It's a magical leverage that has allowed many savvy investors to become enormously wealthy. Bank loans not only allow you to acquire properties that you couldn't acquire in cash, but also to acquire more properties, thus diversifying your risk and potential for capital gains.
Using the bank's money also potentially results in a higher return on invested capital because generally in the United States, the loan rate you will obtain is well below the rate of return you could have on the property. This is something really interesting that you should seriously consider for your investment strategy in the American real estate market.
FAQ
Can foreigners really get financing for real estate in the USA?
Yes, foreigners can obtain financing for real estate in the USA. However, the terms and conditions may vary depending on your financial profile, the property location, and its value.
What is the minimum property value that banks will finance?
Generally, banks are reluctant to finance properties valued below $100,000 because the administrative costs remain the same regardless of the loan amount, making smaller loans less profitable for them.
What documents will I need to provide as a foreign investor?
You'll need to provide proof of income, financial reserves, and other documentation that varies depending on whether you're employed or self-employed. The bank will also require property appraisal and insurance.
What are the current interest rates for foreigners?
Interest rates for foreigners are typically higher than for US residents. As of the reference date in the video (November 2020), the average rate was around 2.87% for residential properties, which is higher than European rates but historically low for the US market.
What is a "cash out" refinance?
A cash out refinance is when you've purchased a property with cash and later obtain a mortgage on it, allowing you to extract some of your equity while maintaining ownership of the property. This strategy is particularly useful in markets where initial financing is difficult to obtain.
