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Can I borrow to purchase a property in the USA?

Screen Shot 2017-10-24 at 3.23.37 PMA simple google search of that exact question will bring up so many forums and answers for you.

 

What I’m here to tell you is, YES 100% you can. But, where you purchase the property then provides the definitive answer.

 

So, what does this mean?

 

First, let’s go back to how finance works in the USA?

 

Credit Reporting In the USA

 

Obtaining credit if you are a US citizen and tax payer is so much harder than we have it here in Australia. Ever heard of the term “credit score or credit rating”? Americans have to build their credit score. This is done so by paying bills and utilities on time, every time, plus applying for small debts like credit cards and personal loans, then repaying them. It’s not like in Australia where you start off with a good score, i.e. no issues to report and you can get going from there. No, in the USA, you start with nothing, which is a bad thing and you have to show you have the capacity and nows to apply, and repay debt. From there, a bank can see you have the history and ability to actually borrow funds.

 

It actually makes sense really? Perhaps those young 25 year olds earning $150,000 per annum that use mum and dads home to secure their first $1million home wouldn’t be in that situation, if we had the same process here in Australia? But, that’s not what we are talking about…

 

So, first step – credit score. As a non-resident of the USA, you don’t have a credit score do you? No, so where does that leave you?

 

If you have $250,000 to $500,000 to park in a US Bank account, just to deposit and earn interest, you may find that one of the local banks may lend to you. Banks like Citibank and Wells Fargo etc. But, who has that sort of cash to just “sit” in an account, you may as well buy the property with cash, no?

 

So, the finance available in the USA for foreigners to buy is quite simply, privately funded Don’t believe the articles saying it’ banks lending. Believe me, we have tried… and failed.

 

So, what do you need?

 

You will require a minimum 30-40% deposit, plus the fees start at $2,500 as an application fee. Then on top there are valuation fees and the loan period can be from 10-30 years.

The next hurdle, they have a term they call ‘rate caps’. What does this mean?

Rate caps is where they can increase the interest rate after a period of time to what they disclose, but capped at this rate.

To explain – you apply for a loan with an initial interest rate of 7.75% then after 3 years, the rate can increase by an additional 2%, then subsequently by another 2 % in the next 5 years, but only by 7% in a lifetime of the loan.

 

So, to simplify this, the loan that you applied for at 7.75% could actually increase to 14.75% sometime during the period!

 

The servicing for these types of loans is very much asset funded and the rent is the basis of the servicing. I.e. your annual rent, if this is sufficient to service the debt, that is what the lender will use to assess if you can borrow.

 

You will also find these lenders will want to first check the property is suitable for them to lend the funds, so don’t go thinking you can buy a property, then get the finance sorted. You may find you need to first check where your lender will in fact lend to, and not just state or suburb, you will need to give them exact addresses. It’s best to check this before you go submitting offers to find your lender will not finance your intended purchase.

 

So, what we have found is, unless you are desperate and have the minimal savings, this method of purchasing is a very expensive exercise. If you cannot afford to borrow at such an expense, should you really be investing in the first place? I say, no.

 

So, how else can you invest in the USA if you cannot obtain finance?

 

Three ways;

 

  1. Savings – do you have savings or redraw just sitting there doing nothing?

If so, you can certainly use these funds to purchase a property.

  1. Equity – do you have available equity? If you have equity available within your Australian property portfolio, you may find you can obtain a loan facility to borrow additional funds for investment purposes, thus you can use these borrowed funds (at Australian interest rates too) in order to finance the purchase. A good mortgage broker should be able to assist you with this.
  2. SMSF – do you have funds available in your SMSF? First, if that’s a yes, the second person to speak with is your accredited accountant/financial planner to confirm this type of asset class is right for you, but, this is certainly another tool to invest in the USA.

 

So, all is not lost for those looking to invest, it ultimately comes down to whether you are in the right position now to get the ball rolling.

 

We have spoken with so many financiers over the years, and yes, you can certainly obtain the finance in the USA, but to date, we have found the cost to outweigh the benefit of borrowing in the USA.

 

Happy investing!

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2 comments…
  • Clinton October 24, 2017, 9:30 pm

    Yes that is correct trying to borrow as a foreign alien is extremely hard even if you have banked with a big bank like Wells Fargo for years, unless you have an ITIN (Individual tax identification number) or a SSN (social security number).

    Some small Independent Banks will but generally only in their own state or county.

    Private lenders make a killing as they don’t get paid interest on their bank accounts in the USA – it’s normally between 0.1% to 0.5%

    The next big issue is finding someone good to do your tax and that can be expensive, do your tax with their financial year ending not ours as it is much easier.

    Reply
    • Todd November 8, 2017, 11:50 pm

      Hey Clinton, yes its certainly not easy hey.
      Tax wise, we have set ours up to match with the Australian tax year, makes for a clean process and our accountants in the USA simply process the tax returns for us and clients.
      Cheers,

      Reply

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