With so many hurdles to leap through to become a US citizen, you might assume that buying a home would be just as difficult, if not more difficult. Can foreigners buy property in the United States, and if so, what’s the best way to go about it?
The United States is actually one of the most welcoming countries to foreign investors. Buying property in the US as a foreigner also comes with certain advantages, such as a stable market, flexible financing options, and tax benefits.
In this guide to foreign property investment, we’ll explain how citizenship status affects your ability to obtain a mortgage loan in the US, how foreign national loans work, and how foreign properties are taxed.
Most foreigners looking to buy property in the United States fall into one of the following categories: permanent residents, non-permanent residents, or non-residents.
A permanent resident has a green card and a social security number. The mortgage application process for permanent residents is almost identical to that of US citizens.
Non-permanent residents are typically in the US on a work permit or employer-sponsored visa. While they do not have a green card, they do have a social security number. If you are a non-permanent resident, you can finance a home using a traditional loan if you’re able to show a lender that you’ll be able to live and work in the US for at least three years.
If your work permit expires earlier, you may still be able to qualify for a traditional mortgage loan if your lender has reason to believe that you intend to remain in the country.
Finally, if you are a non-resident and non-citizen, you are probably looking to buy an investment property or a vacation home in the United States. While you will not be eligible for a conventional mortgage loan, you still have options for financing through private lenders who offer foreign national loans. If you’re able to, you can also buy property in the US with cash.
Buying Foreign Property with Cash
Paying with cash is the fastest and easiest way to finance a foreign property. But just because you can buy a property in the US with cash doesn’t mean that you should. While taking out a mortgage is more of a hassle, a home purchase is not an overnight investment. It takes years for home values to appreciate, so your cash will probably be better invested elsewhere.
Buying Foreign Property with a Mortgage Loan
If you can’t afford to purchase a home with cash alone, you’re going to need to take out a mortgage loan.
If you’re a non-citizen and non-resident, this is where things get a bit tricky – you won’t be able to go through the same conventional mortgage application process as a US citizen, permanent resident, or non-permanent resident. Instead, you’ll need to find a lender that offers foreign national loans.
What are Foreign National Loans?
A foreign national loan is a financing option offered to borrowers outside the US. A foreign national loan can only be used to purchase an investment or vacation property, and the buyer must have no intention of moving to the US.
Foreign national loans are very similar to traditional mortgage loans, but here are some of the key differences to keep in mind.
Higher Down Payment
Because buyers living outside the US pose a greater risk to lenders, foreign national loans require a larger down payment than traditional mortgage loans. You can expect to put down at least 20%, but putting down 25% or more will get you a better interest rate.
Higher Interest Rates
The average interest rate for foreign investors buying in the US is around 7%, compared with 4.5% for US citizens.
Different Documentation Requirements
Because non-residents don’t have credit data or a history of US tax returns to look back on, lenders require alternative forms of documentation to approve them for a loan.
The required documentation varies from lender to lender, but they’ll typically ask for bank statements and/or a written statement from an accountant.
As a non-resident, you are not eligible to obtain a Social Security Number, so you’ll need the next best thing – an Individual Taxpayer Identification Number. You can apply for an ITIN through the Internal Revenue Service (IRS).
Closing Costs & Additional Fees
Like US citizens, foreign borrowers are required to pay closing costs and lending fees, which are typically equal to 2% of the loan amount.
But for foreign buyers, closing on a home can become even more expensive when travel is involved. Real estate buying is a multi-step process, and the cost of traveling back and forth to sign documents and make arrangements adds up fast.
Luckily, the United States allows foreign property investors to use the power of attorney. This means that you can authorize someone in the US to buy and sell real estate for you so that you don’t have to travel.
Paying Taxes on a Foreign National Loan
While buying US property as a foreigner comes with certain tax benefits, that does not mean that it is a tax-free venture. Anyone living in the US, whether they’re a citizen or not, must submit an annual tax return by the end of tax season in April.
It’s also important to note that your tax benefits depend on how you use the property you buy. For example, if you plan on renting out the property, your rental income is subject to a 30% withholding tax. Tax laws also vary by country, so you may be required to make separate tax payments in your home country as well.
Fortunately for foreign buyers, by the time you deduct mortgage interest, property taxes, depreciation, and other expenses, you won’t have to pay taxes on your investment properties for many years. There are, however, two taxes that are more difficult to avoid – the capital gains tax and the estate tax.
Capital Gains Tax
When a foreigner sells US property, they are required to pay a capital gains tax. The amount you’ll have to pay depends on how long the home was your primary residence. If you lived in the home for at least two of the last five years, you can exclude up to $250,000 of capital gains (or $500,000 for married couples).
If you don’t qualify for the primary-residence exclusion, you may still be able to defer the capital gains tax by making a like-kind exchange. A like-kind exchange means that you’re swapping out your property for one of the same type without generating any tax liability from the transaction.
The Estate Tax
Also called a death tax, an estate tax is a federal tax on the transfer of property from a deceased person to their heirs. For US citizens, this only applies to the super-wealthy – as of 2018, the first $11.4 million ($22.8 million for couples) of an estate is exempt from the tax.
The rules are different for foreign buyers, who are only exempt for the first $60,000. To protect the inheritance of their heirs, some foreign investors choose to purchase property through a corporation headquartered outside the United States. Or, you could simply take out a relatively inexpensive term-life insurance policy to cover the tax if needed.
Find a Foreign National Mortgage Lender
The US has long been a profitable market for foreign investors. If you’re interested in buying property in the United States, talk with an experienced lender who will be able to help you navigate the foreign real estate buying process.
The private lenders at Associates Home Loan of Florida have provided foreign national loans for homebuyers in Canada, Australia, Europe, South America, and the UAE. To learn more or start your loan application, give us a call at (866) 257-9476!