How to take a loan application from a foreign national borrower
Foreign nationals who purchase U.S. real estate have a reputation for paying cash, and there’s a good reason for that. According to the National Association of Realtors, it’s the No. 1 way for international buyers to acquire property in the United States.
What you might not know is that plenty of foreign buyers take out mortgages: 44 percent, compared to the 50 percent who are cash buyers .
The international market represents a phenomenal opportunity for U.S.-based lenders and brokers. In 2015-16, foreign buyers spent more than $102.6 billion on U.S. residential property . They also tend to buy properties that cost more – usually around $227,380, compared to $223,058 for the median price of all U.S. existing-home sales .
You can see why a growing number of brokers and lenders have expanded into this market.
Yes, there are some differences when dealing with international buyers. For real estate and lending professionals who have done business only with U.S.-based clients, there may be a fear factor. But these differences are surmountable, especially when you think about the opportunity of serving this active clientèle.
Intrigued? Here’s a high-level overview of what’s involved in taking a loan application from a borrower who lives in another country.
Two Types of International Buyers
First, we need to distinguish between the two types of foreign nationals who acquire properties in the United States.
The first is the foreign national who comes to the United States to work, usually under the EB-3 or L-1 visa program. These people have Social Security numbers, credit histories and places of employment that a lender can verify. In a sense, they have all the criteria required of a regular borrower. The only difference? On their loan application, the boxes for “U.S. Citizen” or “Permanent Resident” are marked “no.” When many lenders talk about foreign nationals, this is the borrower they’re thinking about.
But there’s another type, and that’s the group we’re going to focus on in this article. These are people who live and work in their native countries and have no Social Security number. Their bank accounts are with foreign institutions, and their jobs are usually with companies headquartered in their home countries. They may be buying property as an investment, as a vacation home or as a residence for their children as they study in the United States.
Tips for Handling the Mortgage Application
Let’s say you’re handling a loan application from a potential borrower who lives and works in another country. What kinds of questions should you ask? What do you need to keep in mind? Here are a few best practices:
1. The first step is pleasantly simple: Take the loan application as usual – though you will, of course, have to leave the spot for the borrowers’ Social Security number empty.
You may have heard of another identifier – the Individual Tax Identification Number (ITIN) that foreign nationals can receive through the Internal Revenue Service. That’s a bit beyond the scope of this article, but you can learn more about that program at www.bit.ly/29H6tcm. For our business, though, we don’t ask for an ITIN because our transactions don’t involve a tax liability obligation on the buyer’s side.
Otherwise, the application process is not too different from applications that you’ll receive from U.S. citizens. Borrowers will need to list information related to their place of work and their banking institutions, even if the names sound different from what you’re used to seeing. One difference: Our company does not ask for an international borrower’s credit history – it’s an incredibly complex process. Instead, we ask for a reference letter from their banker to establish, to a certain extent, the integrity of a borrower’s capital.
2. Be sure to ask borrowers how often they are in the United States: regularly, sometimes or rarely? This will help you understand why the borrowers want to acquire property here – after all, why would anyone choose to buy a house in a country they never set foot in? Secondly, if they happen to be in the United States during the loan process, most lenders would probably like to have a face-to-face meeting with them, too. It’s likely the borrowers want to make the journey anyway. But remember to extend an invitation – most foreigners won’t show up without being asked.
3. It is also important to discover the best methods for communicating with the borrowers – some people may prefer the immediacy of a phone call, but coordinating for time zone difference could be tricky. Fortunately, email makes it possible to connect with just about anyone just about anywhere. Even so, you should always be willing to provide a courtesy call to the borrowers and clarify any questions that might pop up during the application process.
4. How would the borrowers prefer to receive their documents, by email or by certified mail? You may discover it’s best to do both. Send your borrower electronic copies by email, so they can quickly review the documents, but also follow up with print copies delivered by FedEx or UPS. You’ll find that most borrowers prefer to receive all documents in a formal manner – this is very important to them. E-sign won’t cut it, nor will a request to “please print out and sign.”
And a quick note about what kind of paperwork you send to borrowers: Not all U.S. disclosure rules apply to foreign nationals. The Privacy Act and the Credit Score Disclosure are two examples of documents that you probably don’t need to ship to borrowers. But you may find it wise to send them all relevant disclosures just as a matter of policy.
5. Is the borrowers’ down payment already with a U.S. banking institution? If not, where is it? (Most lenders require higher down payments from foreign nationals – anywhere from 20 to 30 to 40 percent of the purchase price . Because it is more difficult to determine a foreign national’s credit history, many lenders require a heftier down payment.) If the borrowers plan to wire the down payment from a foreign banking institution, make sure you check with escrow company first.
Also, check with your title company about what kinds of ID it will require. A passport is a must, and an entry visa to the United States is a bonus. Your title company will advise you as to which kind of ID they require. Normally, they will require two forms of ID. You might also ask your borrowers whether the title to the property will be held in their name or in the form of an LLC or some other entity.
6. Another important question to ask borrowers: Are they located near a U.S. embassy or consulate in their native country? Remember, if loan documents must be signed overseas, they must be signed and notarized in a U.S. diplomatic establishment. The title company won’t accept any documents that weren’t notarized by U.S. diplomatic personnel.
In some cases, foreign borrowers will assign a power of attorney to a U.S.-based agent. While this is a common practice, there is a wrinkle that you must not forget: a power of attorney for this purpose will only cover one specific address in one specific county. If you are buying two different pieces of property in two different counties, you must create two different powers of attorney.
Be Prepared for Differences
Keep in mind that many foreign borrowers don’t speak English very well. Though buyers from English-speaking countries such as the United Kingdom and Canada accounted for many purchases, China was the No. 1 source of international buyers of U.S. homes in 2015-16, according to the National Association of Realtors . The good news is that it’s easier than ever to find translation services that can assist you. Help is just a Google search away!
You may encounter other differences beyond language, too. Many devout Muslims believe that charging interest is forbidden by their religion – which is why some lenders offer financing that helps them comply with that rule .
As you can see, there are some special considerations that lending and real estate professionals must make for international borrowers. For service providers who invest the time into this market – to learning the intricacies and finding ways to streamline the loan application process – there can be sizable rewards.
There’s a huge audience of international real estate buyers who need the help that you can provide. More and more lenders and brokers are vying for their business. Why shouldn’t you try to seize the opportunity, too?
Eric Tran is the CEO of Universal commercial Capital, a Huntington Beach based lender with extensive expertise in private money lending. He can be reached at firstname.lastname@example.org or 714-300-8223.
The 5 States With the Most Foreign Buyers of Residential Real Estate
(As measured by percentage of overall foreign purchases of U.S. residential properties)
Florida – 22%
California – 15%
Texas – 10%
Arizona – 4%
New York – 4%