New York Property – Mortgage Financing For Overseas Buyers
Posted by Wei Min Tan on September 1, 2017
Many of our overseas clients buying property in New York pay in cash. This is either
because of personal preference, better negotiation leverage or because they have
a cheaper source of financing from their home country (which allows them to close in
cash in New York).
During the recession, the major banks stopped lending to foreigners. HSBC was the first major bank to resume lending to foreigners and now, many of the global banks such as Wells Fargo and Citibank lend to foreign buyers.
Higher downpayment and rate
Loans to foreign buyers typically require a higher down payment amount, eg 40 percent, and a higher interest rate, from 25 to 50 bps higher than what a local buyer would pay. Given that, mortgage loans to foreigners would be safer to the banks. It didn’t really make sense that they stopped lending to foreigners but that was the trend back then, to be “conservative.” The reason was too much reliance on the FICO credit scoring system (which foreigners do not have). But from a property price perspective, the banks are safe unless property values in Manhattan decreased more than 40 percent, which is very unlikely.
Benefit of leverage
Mortgage financing provides the ability to leverage and magnifies returns to the owner. The borrower could then buy more asset with a primary concern being the ability to cover carrying costs. In Manhattan, a 40 to 50 percent down payment should be able to have rents cover carrying costs.
A key differentiation with getting mortgage financing in the US is that here, we have 30-year fixed rate loans. This means the monthly payment stays fixed for 30 years, all this while inflation and rental income increase over time.
Adjustable Rate Mortgage
Foreign borrowers sometime opt for a 5-year ARM (Adjustable Rate Mortgage) which has a lower rate than a 30 year fixed, but only for the first 5 years. The rationale is that they plan on paying back the loan within 5 years.
Not dependent on age
Getting a loan is not dependent on the borrower’s age (because that would be illegal). The banks would look at the borrower’s income, debt-to-income ratio, global assets and down payment amount.
Experience of the banker
It is very important to work with the right banker within the bank. For example, calling Citibank and speaking to someone at random doesn’t mean that banker is the right match. Reason is that you want a banker who has worked on many deals with foreign buyers, not someone who just learned the foreign buyer program last month.
An experienced banker makes the process much smoother. He would have the right relationships to push the loan through efficiently because getting a commitment letter within the agreed upon time (in the contract) is extremely important. This is why we always recommend the client work with an experienced banker. We would provide references to bankers as well.
Of course, the bank’s main concern is the borrower’s ability to cover monthly debt obligations. This is why the debt-to-income ratio is important. But being high-net-worth individuals, our clients who opt for mortgage financing have always successfully gotten a mortgage here in the US.