There is no doubt that the 2007/8 sub-prime mortgage market crash still weighs heavy on the US mortgage industry. This was a crash which literally brought the worldwide economy to its knees, prompted billions of dollars of rescue funding and gave the industry and investors a wake-up call. That said, in the US we are talking about a country with mortgage debt of $10.3 trillion and where the average mortgage balance stands at US$148,000. So, where do non-American resident investors stand when looking to raise mortgage capital to invest in US real estate?
General analysis of US mortgage market
Just prior to the sub-prime mortgage market crash it became evident that the traditional US mortgage market was ultracompetitive and working on very thin margins. In essence this is what caused a switch in emphasis towards more risky mortgage arrangements which ultimately crashed and burned and we know the results. However, the US has one of the most competitive and the most varied mortgage markets in the world.
Historically the US mortgage industry tended to work on fixed rates for the full duration of any mortgage arrangement. There were short-term offers available but the average US mortgage holder preferred a full tenure fixed rate. In light of the sub-prime market crash we saw some changes in the market with an industry move towards more short-term fixed rate arrangements. However, you will still find 30 year mortgage fixed rates but whether the rates are as competitive as they used to be is debatable.
Is it a good time to buy
There are certain real estate markets in the US which offer better value than others but it is this variation which means there is something for everybody. On the whole, general real estate values in the US topped the pre-crash levels of 2007/8 in the second quarter of 2017. Recent figures show that in the third quarter of 2018 the total value of real estate owned by individuals in the US topped $25 trillion. We also know that mortgages total just over $10 trillion leaving record levels of home equity in the hands of US homeowners – at around $15 trillion.
There are concerns that the US market has perhaps got ahead of itself in the short to medium term amid hopes that Donald Trump would use his real estate skills to manipulate and improve the market. These hopes have been dashed to a certain extent but the US real estate market has performed well of late and is expected to do so for the foreseeable future. Recent attempts by the Fed to implement a number of interest rate rises indicate an underlying economic strength which is reflected in real estate prices. The fact that the Fed seems set to delay interest rate rises, which were previously pencilled in for 2019, is more of a political statement than a change of policy.
How easy is it to get a mortgage in the US for non-residents?
While US residents have access to Fannie Mae and Freddie Mac funded mortgages these are not available for non-residents looking to acquire real estate in the US. Foreign investors will need to go down the “foreign national loan” route in order to obtain real estate finance. While this is still a competitive market, non-residents can expect to pay larger deposits and potentially higher interest rates than US residents. Interestingly, despite the fact that Europe tends to look towards short term fixed mortgage interest rates, non-residents should be able to arrange a 30 year fixed interest rate loan.
The US mortgage industry has always been proactive rather than reactive. The fact that the worldwide real estate market is within the reach of all investors today means that foreign investors not resident the US should still be able to arrange dollar denominated mortgage finance. You may have to shop around a bit, maybe hirer the services of a mortgage broker, but there is finance available.
How has the US market changed?
We have certainly seen a shift away from 30 year fixed-rate terms to more short-term promotional offers akin to the European market. In some ways this seems a little bizarre because surely a fixed-rate term reduces variation and offers a degree of security. However, the way that money markets are at the moment, with worldwide interest rates still at or near their lows, it is difficult to predict rates over the next two or three years let alone the next 30 years.
Who are the main lenders?
While some major European banks were forced to reduce their US exposure, in light of the worldwide economy and real estate downturn, you will still recognise the main foreign national loan lenders. We are looking at companies such as HSBC, Chase, Bank of America, Citibank and Wells Fargo. There will also be other specialist mortgage finance companies targeting particular areas of the market and particular groups of expats.
Interestingly, where the likes of HSBC are involved, investors may already have relations with HSBC which should speed up the application process when looking towards areas such as the USA. As with any industry, previous and ongoing relationships in the world of real estate investment tend to stand you in good stead when looking to new markets.
What paperwork is likely required
There are various pieces of paperwork required for non-residents looking to arrange foreign national loans to acquire real estate. The first requirement is an application form which includes various disclosures and covers issues such as:
Details of the mortgage application – which is usually between 60% and 75% of the purchase price
- Address of property to be acquired together with details of how funding will be used. This will also confirm how the property title will be held prior to full repayment of the mortgage
- Information on the borrower and co-borrowers
- Employment information regarding the borrower and co-borrowers
- Details of all sources of income
- Details of all assets and liabilities
- Breakdown of the real estate transaction including purchase price, deposit, etc
- Signed declaration confirming that all information is accurate
Other paperwork required will include:
- Verification of income, clarifying employment position and employer/self-employment
- Verification of assets and liabilities
- Verification of identity including copy of passport, US Visa or business card
- Credit references from home country or international credit report
- Copy of the property purchase contract
- Evidence of US checking account through which funds will flow
- Signing of loan documents and use of escrow services prior to confirmation of funding arrangements
Summary
While it is fair to say that the US mortgage market has changed since the sub-prime market crash of 2007/8, there is still funding available for non-residents looking to acquire real estate. Even though foreign investors should expect to pay higher deposits and potentially higher interest rates than their US resident counterparts, there is still healthy competition in the foreign national loans market. The simple advice is, shop around for the best deals.
