As published in Scotsman Guide's Residential Edition, March 2012.
Since the recession began, many mortgage brokers and originators may have found themselves fielding more inquiries from prospective foreign-national borrowers — overseas individuals who are seeking mortgages to help them purchase investment properties. The combination of depressed property values, high rental yields, a weakened dollar and low interest rates in the United States can make for a compelling investment in the eyes of foreign borrowers.
Many mortgage professionals are discovering, however, that the availability of loans for foreign nationals has decreased drastically in recent years. Numerous major lenders have scaled back their products, and now only a select few remain. Brokers and originators who familiarize themselves with these products and opportunities can expand their client base and add yet another facet to their business.
To be considered a foreign national, a prospective borrower must meet several basic points of criteria. Foreign nationals cannot have any U.S. residency, cannot be U.S. citizens and, by extension, don’t have a social security number. Foreign nationals most likely will have no U.S. credit history either, as most of them have never had a prior need to borrow in this country.
Broadly, brokers and originators will find themselves dealing with two types of foreign nationals. The first kind of potential investor is one who’s a high net-worth individual and is seeking to purchase a condominium or a single-family residence to use as a vacation home. These investors will commonly be interested in popular tourist destinations such as New York, Los Angeles, Florida or Las Vegas.
The second broad type of foreign-national investor is one who’s seeking to purchase property as a genuine business venture. These investors often have several hundred thousand dollars of cash and may be planning on buying one or two family homes and then renting these properties to tenants, holding their lots as investment properties. These investors may be interested in areas where property values are depressed yet simultaneously offer high rental yields. Cities like Atlanta, St. Louis, Chicago and Phoenix are popular locations with these investors.
Regardless of their investment’s intent, what kind of lender options are available to these borrowers? Although there is no one-lender-fits-all approach, brokers and originators can choose their potential lenders by carefully considering a number of factors:
The borrower’s profile
Which state the borrower is interested in
The purchase price of a given property
What loan-to-value ratio (LTV) the borrower is seeking
How much deposit the borrower has available
The given property’s use
The borrower’s visa status and citizenship
After considering all of these factors, brokers and originators can approach their clients’ options more thoughtfully and expertly. Conventional loans, however, will not be an option when it comes to working with foreign-national clients. The lending policies of Fannie Mae, Freddie Mac and the Federal Housing Administration all specifically exclude foreign-national borrowers.
Brokers essentially have four funding solutions for this type of client.
1. International banks
These would be banks that are typically based in either Europe or Asia and have a U.S. banking or U.S. mortgage license. Oftentimes, this type of lender is best suited for borrowers who can provide as much as 40 percent or 50 percent of their deposit and are interested in purchasing an investment property in excess of $400,000.
Interest rates are typically 4 percent to 5 percent in these scenarios, and there is occasionally the option for borrowers to purchase properties with their choice of currency. Available markets, however, are typically limited only to major gateway cities.
2. U.S. portfolio products
These would be loans that a U.S. bank funds from its cash reserves — holding on its own balance sheet instead of selling. The providers of these types of loans tend to be regional banks, although the market is showing signs that larger funders may soon become more readily available.
These loans range in price from 5.5 percent to approximately 9.5 percent. Because they’re held by the lender itself, the product specifications can be whatever the bank decides is appropriate. There’s often a minimum loan amount of $100,000 and a maximum LTV of about 60 percent to 70 percent.
Whatever its exact terms and specifications, the loan amount will be per property. In other words, borrowers can’t reach the required minimum loan amount by investing in two or more properties to be cross-securitized under a blanket loan. The other challenge with these loans is that they’re often limited exclusively to second-home purchases, meaning that they’re suitable only for borrowers who are seeking vacation residences.
3. Finance companies
These specialist lenders are privately-owned. The profile of their loans is not entirely dissimilar from those offered by portfolio funders. Frequently, the specifics of these loans will reflect agency lending guidelines closely, with the only exception being country of residency and documentation required as proof of income.
These companies can generally offer the most-complete product available. Minimum loan sizes are typically set at $100,000 and limited only to second-home purchases, however. Rates and fees tend to be quite competitive.
4. Private and hard money
These loans are probably the most flexible option and, in addition, there’s a multitude of private lenders that brokers and originators can choose from. Many have maximum LTVs of 50 percent to 65 percent and have minimum loan amounts of $100,000 or more. These lenders often will allow borrowers to offer multiple properties as security, however. Rates can start at 10 percent, but most likely will hover around 12 percent and then increase to about 18 percent, with points from 3 percent to 6 percent being typical. Loan terms regularly range between one year to 12 years.
For foreign nationals who are looking to rent their purchased properties, private and hard-money loans are generally the only option. The excitement of the purchase often can be diminished by borrowers’ realization that they don’t qualify for an adjustable-rate mortgage of 2.5 percent and instead are limited to rates of 12 percent to 15 percent. Brokers and originators should make it clear to their clients that they’re investing for capital growth and thus should consider interest rates only secondarily.
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In dealing with clients who are foreign nationals, mortgage professionals should bear in mind that they are not typically advanced investors. It’s all the more important for brokers and originators to work closely and carefully with their clients to ensure that they fully understand the parameters of their investment and the limits of any resulting cash flow that they may expect.
Regardless, if properly approached and researched, the business of foreign nationals can become a vital part any originator’s sales volume.
Troy McErvale is managing director of Freedom Home Loans, which was founded in Australia in 2001.
The company initially focused on the nonconforming residential mortgage marketplace. One of the most comprehensive brokers in this niche in Australia, its franchising reached nearly 50 franchises and more than 200 brokers on the Australian seaboard in the mid-2000s. It moved to the U.S. East Coast in 2010 and specializes in foreign national lending. Reach McErvale at firstname.lastname@example.org.