Foreign nationals seeking to invest in residential rental properties in the US often face an unexpected challenge: obtaining a loan with no US credit history. While paying in cash is possible, it can be risky to tie up large sums of money in a single asset. Fortunately, options are available for non-US citizens looking to finance a US property.
In this article, we’ll explore the different types of financing available, the steps needed to secure a foreign national loan, and the benefits of financing rental properties instead of paying all cash. By the end of this article, readers will be able to better understand how they can obtain a US mortgage with no credit history in the US, credit score, social security number, work visa, or green card, and make an informed decision on their investment.
Residential Loan Challenges for Non-US Citizens
Foreign nationals seeking to invest in residential rental property in the US may face several challenges when seeking a loan. One of the most significant hurdles is the lack of US credit history. Without a credit report or FICO score, it can be challenging for US banks or financial institutions to assess an investor’s creditworthiness and ability to repay the loan, making conventional mortgages for foreigners riskier for lenders.
Foreign nationals may also face legal and tax-related challenges when investing in US real estate. The US tax system can be complex, with specific rules and regulations for investors. To navigate these complexities, foreign real estate investors may wish to consult with a trusted team specializing in foreign investment home purchase in the US, including a lender, real estate agent, attorney, and tax professional.
Loan Options for Foreign Nationals
Foreign nationals seeking to invest in residential property in the US have several loan program options available for a single-family rental (SFR) homeownership, multifamily property with 2-4 units, townhouses, condos, and condotels. Here are three of the most common:
With this type of loan, the borrower can finance a percentage of the property’s purchase price, sometimes up to 70%. The loan term and interest rate will depend on the lender. Although 30 years fixed-rate Loans are easily available to US citizens, it can be challenging for most foreign nationals who are usually offered an adjustable-rate, but not at Lendai. The main benefit of a new purchase loan is that the borrower doesn’t have to tie up all their cash in one property and can leverage the property to maximize potential returns.
A cash-out refinance loan is used to refinance an existing mortgage and receive a cash payout. This type of loan allows borrowers to tap into the equity they have built up in the property over time. By refinancing, borrowers can also potentially get a lower interest rate on their mortgage, reducing their monthly payments and increasing cash flow. The borrower can then use the cash payout for other investments or expenses.
With portfolio financing, borrowers can finance up to 10 investment properties with a single loan. The main benefit of portfolio financing is that borrowers can consolidate their debt and simplify their finances by making a single loan payment.
How To Obtain a Foreign National Loan With No US Credit
Navigating the application process of obtaining a non-traditional loan may appear complex, but by adhering to a series of well-defined steps, foreign nationals can successfully secure financing for their investment property without having credit in the US. Here are the key steps involved:
Step 1: Estimate your budget
Determine your budget by considering expenses such as the down payment, closing costs, operating expenses, and cash reserves to cover unexpected expenses or vacancies. Rental income generated by the property may allow you to secure financing without being limited by personal income.
Step 2: Obtain pre-approval
Get a loan pre-approval from a lender to know your maximum loan amount and show sellers you’re a serious buyer. During the pre-approval process, a lender evaluates your financial situation and creditworthiness to determine your maximum loan amount and provide a conditional commitment for financing.
Step 3: Prepare your loan documents
Gather necessary documents, such as proof of income, bank account, bank statements, identification, tax returns, and credit profile in your country of origin, to support your loan application.
Step 4: Shop for your investment property and make an offer
Search for suitable investment properties within your budget and make an offer on the one that best fits your criteria. US states many foreign investors consider include Arizona, Texas, Florida, Illinois, and North Carolina.
Step 5: Form a US entity such as an LLC
Establish a US-based entity, like a limited liability company (LLC), to hold the investment property and provide liability protection. To form an LLC, one must file Articles of Organization with the appropriate state agency and pay the required filing fees.
Step 6: Finalize your loan application
Submit your completed loan application and supporting documents to the lender for review, ensuring all required information is accurate and up-to-date to facilitate a smooth and efficient loan approval process.
Step 7: Lock the interest rate
Locking the interest rate means securing a specific interest rate on a loan for a set period, typically 30 to 60 days. This protects the borrower from potential fluctuations in market rates during the loan approval process, ensuring they receive the agreed-upon rate at closing, regardless of market conditions.
Step 8: Loan processing and underwriting
The lender will ensure all requirements are met and verify your financial information. Underwriting guidelines are generally based on four main factors: Property value, debt-service-coverage ratio (DSCR), borrower’s liquidity, and credit profile in the home country.
Step 9: Conduct a property inspection and appraisal
A professional inspector examines the property’s condition during a property inspection, identifying potential issues or needed repairs. In an appraisal, a licensed appraiser evaluates the property to provide an unbiased estimate of its market value, helping the lender confirm that the loan amount is appropriate for the property’s worth.
Step 10: Prepare for closing and take possession
Coordinate with the lender, title company, and seller to ensure all necessary documents are in order and funds are available for transfer. Review and sign all final paperwork at the closing meeting, pay the required closing costs, and receive the keys to your new investment property, marking the completion of the loan process and the beginning of your investment journey.
Why Smart Investors Use Financing for Rental Property
Smart investors often rely on financing to purchase rental properties instead of expending cash for the entire purchase price. There are several reasons why financing is an attractive option for investors, and it often results in a higher return on investment (ROI):
- Financing a rental property can offer investors a tax-efficient strategy for maximizing their cash flow. By deducting loan interest payments from their pre-tax income, investors can decrease their tax liability, which can free up money that can be reinvested in their property or used for other investments. This increased cash flow can help investors diversify their portfolio, improve their rental property, or invest in additional rental properties to generate a higher return on investment.
- Using financing can help mitigate risk. By using a mortgage program to borrow money instead of expending cash, investors can reduce their risk exposure by keeping more cash on hand in case of emergencies.
- Choosing a smart loan option for financing can help investors magnify returns. Leveraging other people’s money instead of only relying on their own funds can allow investors to purchase more properties and potentially experience greater appreciation and cash flow returns. This can lead to more significant long-term wealth creation and a more diversified portfolio.
Obtaining a US loan as a foreign national is achievable despite the challenges posed by a lack of credit history and other obstacles. Foreign investors can successfully navigate the process by understanding the available financing options and considering the benefits of leveraging rental properties. Following the outlined steps enables them to use financing to make good and smart business decisions.
Foreign nationals seeking a loan in the US can contact Lendai, a company specialized in investment property home loans for non-US citizens. With their expertise and tailored solutions, Lendai can help you secure financing at competitive rates to make your US real estate investment dreams a reality. To get started visit lendai.us