More and more individuals purchase overseas properties, sometimes known as foreign investments, for vacation homes or second homes, and also for investment or retirement homes. Once you’ve found your overseas dream property, applying for a loan with which to purchase it follows the same basic steps for both domestic and international lenders. Some pre-shopping research, however, helps smooth the loan process and may be worth securing prior to choosing your property.
The lender who finances the loan to purchase an overseas property need not be based in the country in which the property is located. If you do use a lender in a foreign country, you must meet qualifications similar to those required by U.S.-based lenders. You’ll need to complete an official loan application. The lender requires a legal description of the property and passports for the property buyers. You must also show proof of your income to qualify and show you have the cash for a down payment. Even if you do speak the language, it is sometimes still worth the expense of having a local expert assist.
Domestic and foreign lenders evaluate your property after ordering an appraisal to determine its worth. Lenders also review any potential risks to the property.
Opening an offshore company and a bank account in the lending institution from which you hope to obtain a loan before applying for the loan may be advantageous. Banks look more favorably on overseas mortgage loans from current bank customers. If you have credit cards or do online checking or savings with a foreign-based lender, you already have current financial ties with the foreign lender. Lenders in the host country will have an understanding of the property market and intimate knowledge of the prospects for potential property appreciation.
Compared to applying for a mortgage in the U.S., the battle to finance real estate overseas can seem confusing at best and silly at worst.
And, we rarely have significant ties to the country where we want to purchase the property. We have no credit history, nothing for a bank to latch on to if we default, and are as such considered a high credit risk. The only asset the lender is likely to have access to is the property.
Financing real estate overseas is like borrowing in the U.S. with a zero credit score and on a non-recourse loan. If you are lucky enough to find a bank and escrow agent willing to take on American clients, the due diligence will be stringent and the interest rate high.
How high you ask? In most parts of Latin America, you’re looking at 8% to 12%, with the average being closer to 10%. And that’s the rate you might expect on a 50% loan to value. If you want to borrow 75% of the value of the property, that last quarter of the purchase price might cost you 20% or more.
Still Want to Finance Real Estate Overseas?
- Pull equity from your U.S. home. Your most friendly partner will always be your U.S. real estate. You might get a second mortgage at 2.8% APR, just a fraction of what you will pay overseas. If you have equity in your home, this might be your first best hope to buy real estate overseas. Of course, the days of no-document loans are gone, but this is still a viable option for many.
- Some banks lend to Americans no matter where the property is located. There are a few U.S. banks, and even fewer offshore banks, that will lend to Americans investing overseas.
- Negotiate with the seller. Seller-financed real estate is rare in the U.S. but common offshore. Because credit ratings and the MLS system are nonexistent in most countries, mortgages are hard to come by for foreigners and locals alike. For this reason, seller financing is common.
Seller-financed overseas real estate might mean you are paying the owner directly, in a rent-to-own situation, or taking over the existing mortgage with the original owner as co-signor. If you pay off the debt, the property reverts to you. If you default, the seller steps in and makes payments, taking back the home.
- Developer or builder financing on new overseas real estate. Just about every major new development, including condos, single-family homes, and resort investments, offer financing. Many of these options are funded by the builder and offer better terms than local banks. They want you to buy into their project so they’ve worked the market to offer the most competitive rates available.
- Buy offshore real estate in your IRA. Yes, you can buy overseas real estate in your U.S. retirement account. The most efficient way to do this is to form an offshore IRA LLC, transfer your retirement account into that entity, and then make the investment.
More on Overseas Real Estate in Your IRA
And here is some good news. You don’t need to report offshore bank accounts or investments to the IRS if they are within your retirement account. IRA investments are exempt from FBAR, Form 5471, and related offshore reporting requirements. You need only inform your U.S. custodian of their value at the end of the year and he or she will handle any filings.