What Are Foreign National Loans?
What Are Foreign National Loans?
Achieve the American Dream from anywhere in the world. That’s the driving force behind Foreign National loans, helping non-U.S. citizens purchase investment properties in America. Let’s look at how this loan works and how it could work for you.
For People Outside the Conventional Mortgage Mold
Most conventional loans are geared toward U.S. citizens and residents. People with Social Security numbers, green cards, or visas. Non-U.S. citizens and non-U.S. residents, however, rarely have this documentation. For them, there are Foreign National loans.
Foreign National loans cater to people who live outside the United States and have financial profiles that don’t fit the approval process for conventional loans.
For example, foreign nationals rarely have long U.S. credit histories or FICO scores. This loan, therefore, doesn’t rely on that credit information in the approval process. Most times, there’s no credit check or employment verification. You also don’t need a Social Security number or an Individual Taxpayer Identification Number (ITIN) for approval – which is required for an ITIN Loan.
Foreign National loans can finance single-family residences, condos, and one- to four-unit properties. You can also refinance a mortgage with a Foreign National loan.
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Who can benefit from a Foreign National loan?
Foreign investors. The U.S. housing market is one of the world’s most stable. Many foreign markets have seen increasing instability, sending ripples of fear through borrowers and banks abroad. It’s a big reason international buyers purchase tens of billions of dollars worth of U.S. residential properties each year.
Current property owners. If you’re a foreign national with an investment property in the U.S., you can benefit from today’s attractive interest rates by refinancing with a Foreign National loan.
Non-residents. If you don’t have a U.S. green card or visa and your income comes from abroad, you’re a good candidate for a Foreign National loan. You don’t need legal residency in the U.S. to earn income with a U.S. investment property.
If, however, you are a foreign citizen who earns U.S. dollars while working in the United States and paying U.S. taxes, you are not considered a foreign national. In that case, you are probably a good candidate for an ITIN loan. Don’t have an ITIN? You don’t have to live in the U.S. to apply for one.
A Non-Qualified Mortgage Program
One of several types of non-QM (non-qualified) loans, Foreign National loans don’t conform to criteria set by the Consumer Financial Protection Bureau (CFPB). However, by law, non-QM loans must meet the CFPB’s “ability to repay” rule. This requires mortgage professionals to vet the borrower’s financial situation and to set loan terms they can reasonably afford.
What are the requirements for Foreign National loans?
Like all mortgage loans, approval relies on several factors, including liquid assets, creditworthiness, and overall ability to repay a loan. But some common requirements for Foreign National loans include:
- Cash. How much will you need to put down? The common range for a Foreign National loan is 20% to 30%. Closing costs, which some borrowers pay in cash, are usually between 2% and 6% of the loan amount. Mortgage professionals may wish to see cash reserves; having at least six months of mortgage payments in the bank is often preferred.
- Foreign residency. Borrowers must be legal residents of another country, living and working there, only visiting the U.S. for short periods.
- Solid financials. While there is no U.S. income verification with a Foreign National loan, a mortgage professional might want to see financial information from the borrower’s home country. This could include bank statements, tax returns, credit references, and asset-verifying documentation.
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Can you live in an investment property?
No. Living in a home you purchased as an investment could breach the terms of your mortgage loan. If you live there for less than two weeks a year and try to rent it the rest of the time, the IRS considers that home an investment property.
You can’t, for example, buy a multi-unit investment property and maintain one unit as a residence while renting the others. You can’t use an investment property as a vacation house during your trips to the U.S.
The Pros & Cons of Foreign National Loans
The Pros
- Versatility. Similar to conventional mortgages, Foreign National loans have several popular term options. For the best interest rate, you might choose a 5- or 7-year adjustable rate mortgage. A 30-year fixed-rate mortgage offers predictability, while an interest-only loan keeps initial monthly payments low.
- Stability. The U.S. dollar is one of the most stable currencies in the world. Owning a home that’s valued in dollars and protected by U.S. law provides financial security not found in some other countries.
- Credit building. Making timely mortgage payments is a great way to establish and build credit in the United States.
- Equity building. While real estate appreciation varies by location and fluctuates over time, the Federal Housing Finance Agency reports an average annual U.S. home price appreciation rate of about 5%. The property you buy today will almost certainly be worth much more in years to come.
- Tax benefits. Unlike a primary or a second home, with an investment property, you can deduct expenses such as maintenance, property taxes, mortgage insurance, and more.
The Cons
- Down payments. As Foreign National loans are considered riskier than other loan types, the down payment requirements are usually higher.
- Interest rates. While rates vary by mortgage type and borrower situation, the percentage can be somewhat higher with Foreign National loans than with conventional mortgages. How much more? 1% higher is common.
- Approval time. If the approval process involves documentation from a foreign country and communication with people in that country, it could take longer compared to other loan programs.