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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2018

A Never-Slowing Pipeline

Foreign borrowers require extra documentation, but are worth the effort

Real estate investors coming over from other countries — especially China, Mexico and Canada — and paying cash for properties in the U.S. is not a new thing, but it does seem to be a growing trend. According to a National Association of Realtors survey, foreign buyers and recent immigrants spent a stunning $153 billion on U.S. residential properties from April 2016 to March 2017, eclipsing the previous survey high by more than $49 billion. Some 56 percent of those are cash buyers, while 44 percent are taking out mortgages.

Mortgage originators should know about this lucrative market, but more importantly, they need to know about the underwriting process that loans for foreign-national borrowers must go through. What are lenders looking for in the approval process? How do they look at paperwork and documents from foreign countries? Knowing the parameters and obtaining the right documents up front will make the process go smoother and faster.

Two borrower types

Keep in mind, the usual route for most foreign-national borrowers is hard-core hard money. They often want to close fast, so underwriting consists of “show me the equity,” and they get a quick loan at a 10 percent interest rate — at least. Well, foreigner or not, business is always competitive, so if you can offer these foreign borrowers a loan in the range of 6 percent interest, you can surely enlarge your pool of potential clients to include those who think the 10 percent to 12 percent range is too steep for comfort.

Before going into a step-by-step underwriting process, however, it is important to understand and differentiate between the two types of foreign-national borrowers. The first is the foreign-national who comes to the United States to work, usually under the EB-3 or L-1 visa programs. They generally have Social Security numbers, credit histories and places of employment that underwriters can verify.

In a sense, these foreign borrowers have all the criteria required of a regular U.S.-born borrower. The only difference is the “No” mark in the “U.S. Citizen” and/or “Permanent Resident” boxes on the loan application. When many lenders advertise their foreign-national loan programs, this is the borrower they are talking about.

There is another type of foreign national, however, and the underwriting for this group gets a bit trickier. These are people who live and work in their native countries, so have no U.S. Social Security number. Their bank accounts are with foreign institutions and their jobs are usually with companies headquartered in their home countries. They may be buying property as an investment, as a vacation home or as a residence for their children who are studying in the United States.

Underwriting issues

To get this second set of borrowers through underwriting and close their loans, originators need to know their lender’s guidelines on a variety of issues, including downpayments, income verification, credit histories and personal tax liability. Let’s dig into each of these issues to see what you need to obtain from these foreign buyers.

The first issue is the downpayment. For most lenders, 35 percent is the minimum amount required, although some lenders do make exceptions in tier one, top-grade major metropolitan cities. Even then, most lenders won’t loan more than 70 percent of the purchase price. The minimum loan amount is generally $300,000, while $5 million is the safe range for the maximum limit on these loans.

In addition, the downpayment has to come from a legitimate banking institution. To be legitimate, the bank has to be registered with the international bank registry, not appear on a U.S. Department of the Treasury blacklist or be located in a country that falls under embargo restrictions and/or prohibitions — such as North Korea, Iran or Cuba, to name a few. As a matter of prudence, originators should do an advance check with their title company about the wire transfer from such institutions.

In some cases, the downpayments for these types of foreign-national loans come from gifts from the parents or relatives. In these cases, the underwriters also will ask for a gift letter, the donor’s bank statements and proof of the fund transfer. Last, but not least, the lenders will need 12 months of principal, interest, tax and insurance payments up front, plus all monthly debt liabilities, because a reserve is required. The gift contribution can cover this reserve requirement as well.

When it comes to income verification, for borrowers who reside and earn income in their country, underwriters will need them to provide certain proof of income such as tax returns — which have to be translated into English — for the previous two years. If their native tax system doesn’t support this, underwriters may accept a letter from a certified public accountant, pay stubs or a letter from the borrower’s employer on company letterhead. There must be some proof of income included in the loan package no matter how foreign this proof looks. 

To verify a foreign borrower’s credit rating, underwriters will use the international credit reporting system. If none of the borrower’s credit history is available — which is often the case — underwriters will likely ask for three trade references from the borrower’s native country, which can be either credit cards or any relevant trade-lines reports.

On the issue of personal income tax liability, underwriters normally will not require an ITIN, or individual taxpayer identification number, for a purchase or refinance mortgage that isn’t a cash-out transaction, but they will require one for any cash-out transaction. The ITIN number is the identification that the Internal Revenue Service gives to foreign nationals for tax purposes only. Make sure your borrowers apply for one, which can be done online and is not very hard to get, but it will take some time to get, which could impact a borrower’s ability to close on time.

Finally, all lenders will require the borrower to sign an agreement to submit to United States jurisdiction. This signed form ensures that U.S. courts are the only and final arbiters for any disputes that might arise from the transaction. No lender would underwrite any loan without some form of litigation recourse in place that is within U.S. jurisdiction.

Closing the deal

Some might say that this is a lot of paperwork to require from a borrower, but it is the difference between a 6 percent interest rate and a 10 percent hard money loan. Originators can convey a clear message to their potential clients that if they are looking for a competitive and affordable interest rate, they will need to put in some extra work during the loan-approval process. Otherwise, there is always the hard money option out there — at a rate of 10 percent or more — which requires nothing except the equity in the property as collateral.

It might sound cumbersome and hard to get all of these documents in hand at the beginning, but once you get the hang of it, originating a foreign-national loan is still a simple process, especially compared to the agency-loan products available on the market presently. Don’t forget, however, that foreign nationals are exempt from consumer-disclosure rules, so it is a good business practice to send these borrowers an explanation of all fees and rate disclosures upfront, along with an explanation of the loan process, definitions of loan terminology, plus the duties/responsibilities of any third-party vendors that will be involved.

Does it sound like more work than you normally do on a loan? Definitely not, and originating foreign-national loans can open up a whole new pipeline for your business in a growing market that is relatively interest rate proof.


 


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