A charming Andalusian villa with a view of the Mediterranean, or a beachfront condo in the Caribbean? Wherever your dream overseas property lies, you’ll have to answer the same question. How will you finance an international home purchase?
Living abroad can offer a lower cost of living, exposure to a new culture, and lower home prices. Purchasing an overseas property can also help diversify your financial portfolio. However, the headaches of foreign ownership laws and banking standards are enough to dissuade most would-be expats.
Let’s dig deeper to demystify international real estate financing in Central America, Europe, South America, and Canada.
Seek help from experts
Most of what you know about real estate will not apply to other countries. Even experienced investors require local help when buying a property abroad.
“It’s always best to find a local agent or partner who can give you best advice about local laws for home financing,” says Glenn Carter, a Canadian real estate investor who works for Condo.Capital.
“[When] I bought a house in Florida, the financing was obviously trickier than if I were a U.S. citizen,” Carter says. “We partnered with a local realtor and lawyer that specialized in overseas buyers. We also found a Canadian bank that had a presence as well in the U.S., which facilitated the financing process nicely. Before this, we had asked U.S.-based banks for a loan, and the interest rate was astronomical because we were foreign buyers.”
Why don’t foreign buyers qualify for the interest rates available to residents? “The problem is that a foreign credit score doesn’t count for anything,” Carter explains. In other words, when buying property overseas, you’re treated as though you have no credit score. When Carter tried to borrow from a U.S. bank he was offered a 8% interest rate. The Canadian bank he reached out to, on the other hand, offered him rates of just 3%.
SuperMoney tip: Look for a bank from your country that also works in the country where you want to buy a property. Only they will consider your credit scores valid.
Finding financing overseas
Securing financing from a foreign bank can be challenging.
“To become a risk-free client of a European bank as a non-EU national, you will first need to prove your worth,” says George Kachmazov, founder of Tranio, an international real estate broker.
If you can afford it, you should buy your first couple of properties outright, says Kachmazov. This will provide you with verified income and assets that you can leverage with local banks.
But what if you don’t have the savings to outright purchase your first property?
“I see people take a cash-out refinance mortgage or a home equity line of credit on their residence in the U.S. to buy a second home abroad,” says Vincenzo Villamena, managing partner of OnlineTaxman, a firm that offers tax advice to U.S. expats.
“Leveraging your property is smart because it uses the U.S. banking system to finance your home purchase abroad,” Villamena says.
The downside? If you fail to make your payments, you could lose your home.
Another option is to finance your overseas purchase with an unsecured personal loan.
Borrowers with excellent credit can qualify for loans of up to $100,000 with low interest. Although $100,000 won’t buy you a chateau on the French Riviera, it’s more than enough to purchase a charming home in many countries.
In her book, “How to Buy Real Estate Overseas” (John Wiley & Sons, 2013), Kathleen Peddicord recommends new investors select modest properties. Property taxes usually depend on the size of the property.
SuperMoney tip: Start small. If possible, buy with cash. Consider using your current home as collateral to get lower rates without a local bank or a regular mortgage. Failing that, apply for a local personal loan.
Consider local rules
Even when financing from a local bank or lender is possible, banking and legal requirements for overseas home purchases challenge new investors.
Let’s say you’re financing a property in Mexico with a local bank. First you’ll need an immigration card and a Mexican source of income. Next, open up a Mexican bank account and spend three to six months making deposits which amount to approximately 2.5 times the monthly payments of the mortgage you request. You’ll also need at least two open lines of credit in Mexico. This means that it will take you about a year just to start the process of buying your home.
You don’t always have to become a resident to qualify for a mortgage, but if you don’t, it may limit how much you can borrow.
“In Austria, the United Kingdom, Hungary, Germany, Portugal, France, the Czech Republic and some other countries, nonresidents are generally eligible for 50%–60% LTV at most,” Kachmazov says.
Kirill Schmidt, the head of financial services for Tranio, points out that “some countries also have minimums and maximums on mortgage amounts. For instance, in Italy, a property bought using a mortgage cannot be cheaper than 50,000 euros [about $54,400 U.S.]. In Switzerland, the minimum is 580,000 euros [about $631,100].
By contrast, in other countries, mortgages are difficult to obtain for expensive property. In Hungary, mortgages are not issued for real estate valued at over 130,000 euros [about $141,450]. In Bulgaria, the magic number is 220,000 euros [about $239,400], and it’s 830,000 euros [about $904,140] in Cyprus.”
SuperMoney tip: Check local banking requirements before deciding on your source of financing. Buying with cash, or at least having enough to reduce the loan-to-value rate of the mortgage, can improve your chances of success.
You have six options to consider when financing a property overseas.
Unless you already have assets overseas to act as collateral, it will be difficult to get a local bank to finance your property. Finding a bank that also operates in your country of residence will improve your odds.
When these bank loans are available, they can offer the cheapest form of credit. If you decide to go down this path, hire an expert who can walk you through local banking rules.
If you have the savings, buying with cash is the fastest and cheapest option.
While traditional IRAs can only invest in mutual funds, stocks, bonds, and money market funds, self-directed IRAs can contain other types of investments, such as real estate (source).
Buying real estate with an IRA enables investment gains, tax-free growth, protection against inflation, and the chance to diversify your IRA portfolio.
However, you can only use an IRA to invest in real estate if you don’t live on the property. This restriction expires when you reach retirement age (source).
You’ll also miss out on some of the tax benefits of an investment property. These include the deduction of your property taxes, mortgage interest and depreciation.
“A self-directed IRA can be a good and a bad thing,” says Vincenzo Villamena, CPA. “It allows you to use an IRA to purchase real estate, which is particularly helpful in foreign countries where the cost of credit is high. However, you also need to look at the local tax laws to check whether it is worth it. While the rental income and capital gains from a rental property are tax-free within the self-directed IRA, that does not dictate what the local taxation would be.”
SuperMoney Tip: The rules regulating IRAs and real estate are complex. You should talk with a qualified tax expert before you use your IRA to purchase an overseas property.
To illustrate: If you buy a property with a Roth IRA, you’ve held it for 5 years, and you are now 59½, you can live there with no tax penalties. However, if you bought it with a traditional IRA, you will have to pay taxes on the property value of the house before you can live in it.
When cash is not an option, consider tapping into your home equity. If you’re investing in a country without a developed banking industry, it may also be the cheapest. Getting a home equity line of credit (HELOC) also makes you a cash buyer, which provides leverage when negotiating your price.
It is also possible to finance a property by borrowing directly from the seller. Seller financing is an option you often find in developing countries in which bank financing is difficult to get (source). Developers will offer foreigners the option of making a down payment, paying monthly installments during construction, and then making a balloon payment when the property is ready.
For example, a developer in Belize recently offered five-year funding with rates under 5% APR to investors in their beachfront condo resort if they made a 30% down payment. (source).
Buyers with excellent credit can fund an overseas purchase with an unsecured personal loan. If your credit score is high enough, this option can offer incredibly low interest rates.
Financing with a personal loan avoids the risks that go with leveraging your property with a HELOC. This type of funding is particularly attractive when you’re investing in a developing country with high mortgage rates, and the cost of property is cheap.
Looking to take out a personal loan to finance your overseas dream home? SuperMoney can help. Considering a HELOC or a standard mortgage? Or just want more information on mortgage options? We can help with that, too.