How to finance a property in the USA

By way of background, the lending market is very different in the US. In Australia, if you want a loan with the ANZ, you get a loan with the ANZ. They are a bank that operates nationally. As do Westpac, St George / BankSA, Commonwealth Bank, National Bank and so on. 

By contrast, in the US, each lender needs to be registered in the particular State that they want to offer loan products in. Consequently, there are very few lenders who are registered in all States. Some truly National lenders in the US are Bank of America, ING Direct, Wells Fargo and Ditech. And, that is about it.  

Problem one – none of these lenders offer loans to foreign nationals.  

The same rules apply to mortgage brokers – they are registered on a State by State basis also. In reality, it is no good talking to a broker from New York (or even worse, in Australia) if you want to buy a property in Texas. They will not be familiar with the lenders and lender policy in that location. You need to talk to a broker active in the market you want to purchase in. 

What that means is that if you wish to finance your property purchase, you need to select your property first. The lender selection will depend on the location of the property (which State it is in, but often also which county). 

So that is step one – decide which State you want to buy in. 

Some States, like Florida for example, have a reasonable number of lenders who offer loans to foreign nationals; however they are restricted to the State of Florida for such loans. Other States have no lenders that will offer loans to foreign nationals. And then there are some States (such as NY for instance), where there are only 1, 2 or 3 funders who extend credit to foreign nationals to chose from. 

And that is step 2. Identify the lenders that will extend credit to foreign nationals in that location. 

Whether the lender will extend credit against the property depends on a number of variables, but the most important factors are: 

1. Purchase price

2. Property type (i.e. is it single family residential, or mutli-family, or apartment block)? 

If you are like most Australians, you are looking to take advantage of the price reductions as a result of the GFC, and purchase property at a low purchase price. Unfortunately, the lenders will probably have a minimum loan amount or minimum valuation of the purchase property, which will also vary from location to location. 

Step 3 – decide which property you wish to purchase, and see if you can then fund it.

I know what you are thinking…. That it seems counter-intuitive to do this. Perhaps your objective is to leverage as much as possible, and thus your property location will be selected upon where you can achieve greatest amount of leverage. Be prepared for a maximum of 70% (or even 60%) LVR. 

There is one more problem I have not discussed. Australian banking legislation. Some lenders (like Lloyds TSB, and Barclays Bank (both in the UK) for example) offer international mortgages to residents of many countries. However Australian legislation precludes them from offering loans to Australians living and working in Australia. 

So there is the dilemma.

And the reason why most Australians say they want to invest in US property, however do not. It is very, very difficult to do so. And I have not even touched on the complexity of real estate practices and purchasing yet (which also varies State to State). 

I talk to a lot of people, and observe the following: 

1. Many people seem to have a strong desire to invest in the USA

2. The desire seems to be to purchase lower priced dwellings that have decreased in value as a result of the GFC, as well as properties that will deliver a strong rental yield

3. Investors have some cash, but would like to leverage as much as possible to enhance the return

4. Investors knowledge is growing, but not at a level where they could invest with a degree of comfort yet (for reasons explained above)

5. Investors usually don't know exactly where they wish to invest yet 

The obstacles and risks associated with this strategy are as follows: 

(a) Investors will find it difficult to qualify for a loan due to the property prices they are seeking. Thus any purchases will need to be bought with all cash most likely

(b) Any properties bought will be exposed to potentially poor returns if there is even one poorly performing property in your portfolio, thus your investment is exposed to higher risk of loss

(c) Time and effort and financial cost to complete due diligence is high (especially if the investor is going to fly to the US to view properties)  

Investment in a pooled property / private equity fund would be a better solution for the majority of people. I say this because: 

1. The upfront costs and time compared to doing it yourself are lower

2. The investment risk is spread over a few hundred properties instead of 2 or 3

3. You will be able to utilise leverage within the fund itself, and thus enhance your returns that you would not achieve
personally, and do so at historically low US interest rates

4. You will still be able to take advantage of decreases in property values

5. You will still be able to take advantage of favourable exchange rates  

Quite honestly, this is what I think the majority of people in Australia (including people on this website) who have an interest in investing in US property should be doing – 95%+ of people do not know enough about US property (and US property law, property financing, etc) to invest with a through understanding of the investment. Thus, poor knowledge equals higher risk. 

Have a look at an interview I did with Sky News a month or so ago – it might interest you

 http://www.switzerbroker.com.au/broker-video/troymcervale/  

My contact e-mail is [email protected] if you wish to contact me

As you can read; two years ago there were challenges for foreigners obtaining finance in the USA, these days (Dec 2013) it's pretty easy to be honest.

While there are still plenty of options for financing through private lenders, hard money lenders, vendor financing, etc  (typically referred to as "non-bank" loans). It's quite easy to get financing in all 50 states through regular old banks at terms not far off what is offered to US locals. Expect to put down a sightly high 25%-50% downpayment, but otherwise the rates will be decent a 4-5% or so and the term length 10-30 years.

Rates on the 30 year fixed rate mortgage dropped since the GFC to a low of around 3.3% in the middle of the year (2013) but have been rising over the last 6 months or so. You can see a nice graph of this here http://www.barchart.com/economy/mortgageallrates.php  No guarantees what will happen in the future, but lots of smart investors are betting on higher rates going forward.