Buying Property in The USA
Buying your own property, whether as a vacation property, investment or family home, is an exciting business – especially abroad.
This article addresses common questions and uncertainties about financing and the buying process as well as important information, vocabulary, risks and resources – so that nothing stands in the way of your dream of owning a home in the USA.
I discuss what to look out for and what to research so that a foreign buyer gets financing at all, is taken seriously by the seller and can successfully complete the purchase.
There are some expressions that non-Americans may not have heard. First, you find frequently used and helpful vocabulary:
The appraisal is often mandatory for financing. The actual market value of the property may differ from the selling price, which is particularly important with government loans (government loans only pay for market value). Just like good research, the broker can give an insight into the market value of the property in advance, but if there are deviations at the end, it can result in a new basis for negotiation. Average cost around 300-600 USD.
The final step in the buying process is closing. The buyer meets with his realtor (if hired) and the closing agent to sign papers, confirm information, and most importantly, pay the closing costs.
Final closing costs, which are the responsibility of the buyer, include lender, attorney and city office fees, as well as insurance, taxes, appraisal, inspection and registration. Cost point for the buyer on average 2-6% of the loan amount. As a seller, you also have closing costs such as taxes and realtor fees. Average cost to the seller of 8-10% of the loan amount.
The Closing Agent is a professional Real Estate Attorney who ensures that the purchase transaction is legal and correct. The participation of buyer and seller as well as realtor, escrow, title company and lender is checked and confirmed. At closing, the law firm is paid the Attorney Closing Fee, which averages around USD $600-$1000.
Credit Report Fee
The credit report fee is charged at closing, which is common for any major purchase. Average cost at USD $30-$50.
Debt To Income Ratio
To be eligible for financing, the average debt-to-income ratio must be below about 43%. That means total monthly payments like car, credit card, and loan payments combined shouldn’t exceed 43% of total income. Depending on the loan provider and the situation, this percentage may vary slightly.
The deed certifies the owner’s right to claim ownership of the property. In contrast to the title, this describes who ultimately owns the property.
This down payment (compared to the Earnest Money) is the promise to the bank. The amount is part of the purchase price and is not financed by the loan. The higher the down payment, the greater the responsibility and promise of repayment, and the more likely the lender offers the loan. If a downpayment is below 20% of the home purchase price, the lender often requires a Private Mortgage Insurance. Getting a loan with no down payment is possible, but rare.
The Earnest Money amount is set between the buyer and buyer-agent and then promised by the buyer with the offer to the seller. This confirms the seriousness of the buyer’s interest in the property. The amount is usually credited to the buyer upon closing. If the purchase does not go through, the amount will be refunded to the buyer, unless the failed sale is caused by the buyer.
This is an agreed third-party account into which ongoing real estate costs such as taxes and insurance are paid by the borrower. With each monthly loan installment, an additional amount is paid, which is transferred to the escrow account. The bills are then paid annually from this account. In this way, the companies involved, such as the lender, can be sure that everything is always paid on time.
FIRPTA Withholding Tax
FIRPTA (Foreign Investment in Real Property Tax Act of 1980) is a US tax law that ensures foreign sellers pay income tax when selling real estate in the United States. As a result, the buyer is obliged to withhold 15% of the sales price in taxes and pay it to the state. There are some exceptions, for example if the property is being bought for residential use or the selling price is no more than USD $300,000. In addition, the seller can report the sale on their US tax return and reclaim any overpaid taxes. Another option is the Witholding Certificate from the IRS.
Some buyers can apply for government grants. First-time buyers in particular are likely to receive financial support from the state. There are various offers, such as cash grants, tax credits and interest rate reductions, to make the purchase easier. Be sure to read the fine print so you can use the grant properly.
HOA Homeowner’s Association
A HOA is often for apartments or houses in neighborhoods and deals with common areas, insurance, and house exteriors. However, keep in mind that each HOA may have a different contract and the fine print plays a big role here. The monthly costs that the homeowner has to pay also differ. This is where it can be a relief as well as a burden – ask your realtor for the right paperwork.
In order to be able to finance a home of your own, you must already have signed your new homeowners insurance. The realtor can often recommend an insurance company, but it’s worth getting a few quotes depending on what state or territory the home is in or what’s important to the buyer. Flood and storm insurance (for named storms/hurricanes) is also required in some areas.
The insurance is divided into Dwelling (for damage to the house), Other Structure (for damage to e.g. garage, shed or fence), Personal Property (for replacement of e.g. furniture, clothing), Loss of Use (for maintenance costs, such as hotel, in the event of damage), Personal Liability (for claims arising from damage to others or their property caused by owners) and Medical Payments (for medical expenses of damage to others caused on the property, regardless of who is at fault).
When you have decided on a property, or are very interested and want to move forward in the financing process, the next step is often the home inspection. You can either order an inspection yourself, but it is often best to simply do this through your broker, who has experienced referrals. The buyer then receives the inspection report and can decide how to use this information for further negotiations.
Lead-Based Paint Inspection
Property in the US built before 1979 could have lead paint, which poses a significant health hazard. So if you want to buy an older property, this inspection is mandatory. Average cost at USD $300.
Here it is really best to contact as many as possible, as both the areas of interest and the perception of interests can be very different. Not every lender works with foreign clients, and the financial situation also makes a difference. Both banks and private companies act as lenders and each has its own advantages and disadvantages.
MIP Mortgage Insurance Premium
A loan insurance premium must be paid for an FHA loan. The current MIP rate is 1.75% of the loan amount.
When you look at a real estate ad, you might stumble across terms like FHA or USDA. These are different types of loans. It is interesting to know when you are eligible for which types and how best to use the advantages.
Conventional Loan: There is no government insurance or assistance, so it comes with higher requirements. Average requirements: Credit score of at least 620, down payment often 20%, debt-to-income ratio below 43%.
FHA Loan (Federal Housing Administration): Requires an additional loan insurance (FHA Mortgage Insurance) that the buyer must pay (MIP Mortgage Insurance Premium). Average requirements: Credit score of at least 580, deposit 3.5%, debt-to-income ratio below 43%.
USDA Loan (U.S. Department of Agriculture): For rural areas and buyers with incomes below the specified income limit. Also requires a so-called guarantee fee of 1% upfront and a 0.35% annual fee. Average requirements: Credit score of at least 640, 0% deposit, debt-to-income ratio below 41%.
VA Loan (Department of Veteran Affairs): For military veterans, current military personnel or their spouses. Average requirements: no minimum credit score, 0% deposit, debt-to-income ratio below 41%.
Offer to Purchase/Purchase Agreement
When buying a property, an Offer to Purchase is deemed to be ‘conforming to contract’ when it has been accepted in writing and signed by both parties. This signed offer is then referred to as the Purchase Agreement. In many cases, however, the contract contains certain conditions that must be met in order for the sale to go through.
Some US states require a pest inspection before a loan is approved, especially VA loans. Average cost at USD $100.
PMI Private Mortgage Insurance
Private Mortgage insurance protects the lender if a borrower fails to repay their loan, thus reducing the risk for the lender to give a loan. It allows a buyer to qualify for a loan that they otherwise might not have been able to obtain. Typically, a borrower with a down payment of less than 20% of the home purchase price must purchase loan insurance. Cost point on average at 1% of the loan amount.
Before you start looking for a house, you should get a pre-approval that specifies how much money the lender will lend you and under what conditions. This not only helps as a buyer to know what to shop for, but also helps the seller since a pre-approval shows confirmed interest and buying power. You can get this document from your lender.
The lender may require the buyer to pay any interest accrued between the closing date and the date of the first mortgage payment at closing.
Every homeowner owes the property tax to the local authority. At closing, the first 12 months of property tax are often due. The value of the property tax can be calculated using public records or the appraised value.
A property title is the right of ownership for use, modification, and transfer. With the title come fees at closing for Title Search (approximately $200 USD), Transfer Tax (approximately $1 per $500 USD of property value) and Title Update (approximately $50 USD). The Title Insurance is also important to understand.
Rate Lock Fee
Some lenders offer to hold the current interest rate between pre-approval of the mortgage and closing. This service may be free depending on how long the rate lock is in place, but some lenders may charge a fee of around 0.25-0.5% of the purchase price.
Some US states require a land or property survey before a sale can be completed. The fee goes to the surveying company that verifies and confirms the property lines. Average cost at USD $400-$900.
When buying a home in the United States, buyer and seller are represented separately by realtors. The buyer hires the buyer agent and the seller hires the seller agent (or listing agent). It is also possible, but more uncommon for an agent to represent both sides, which is then called a dual agent. Buyer agent and listing agent each charge 3% of the purchase price (minimal differences depending on the US state), which are due at closing. These costs are often paid by the seller, but offer a good basis for negotiation. Cost point on average at 6% of the loan amount.
This fee is paid to the local city or county government to update public property records. Average cost at USD $100.
At closing, the origination charges (incl. underwriting fee, commitment fee and document preparation fee) are billed, which compensate the lender for the work to check the creditworthiness, as well as create and approve the loan. Cost point on average at 1% of the loan amount.
Buyer and seller can agree to increase the sales price and loan amount. This allows the buyer to have the closing costs financed with the loan and does not have to pay everything out of their pocket. The seller ends up getting the same money and can close the deal securely, so both sides have an advantage.
The title insurance is a form of liability insurance that protects lender and homebuyer from financial loss caused by defects in the title. There is title insurance for both the owner to protect the homebuyer from title issues and the lender to protect them from title issues. Owner title insurance is optional, but most lenders require borrowers to obtain lender title insurance before they can obtain a loan. Cost item for owners insurance averages USD $500-$800 and for lender insurance averages 0.5-1% of the loan amount.
Financing a home in the US as a non-US citizen is doable, but it comes with extra work. Here is the process for buying property with financing, as well as further insights, difficulties and tips.
The process of a purchase with financing usually looks like this:
Go house hunting
Submit Offer to Purchase
Perform inspection & appraisal
Have loan approved
What matters to lenders is financial responsibility (usually proven by the credit score), total debt, as well as lengthy legal residency in the US (like visa) and a steady income.
If you want to get financing, you have to fully disclose your finances to the lender. Being able to prove every transaction and not trying to hide anything plays a major role here. Especially in the 90 days before the loan application and closing, you should keep your accounts as steady as possible. Absolutely avoid gifts of money, sales and extraordinary transactions, since the lender should not question anything.
What is typically required for non-US citizen financing:
A valid work visa.
A valid social security number.
Work permit documents.
Proof of employment.
A good credit history.
Proof of income.
What can become difficult as a foreign buyer is replacing these requirements if you can’t fill them. For example, if you don’t have a credit score or US bank account, it’s best to bring all of your foreign financial details with you. Proof of long-standing bank accounts and income, as well as credit card and loan payoffs can definitely help.
Additionally, you may be able to show that you either intend to move to the United States or plan to reside here regularly. Because another thing that is important to a lender is to know that once you get the loan, you don’t just leave the country and neglect your payments.
Consider what the lender wants to see – financial responsibility!
Tip #1: Co-Sign! If you have relatives or friends in the US (with good credit scores and income), you can ask if someone would co-sign the loan to give the lender more security.
Tip #2: Find the right lender and realtor! That really decides everything. Also check here for brokers with CIPS.
Tip #3: Some foreign banks work with US banks or have a presence in the US market. So it may be possible to request a loan through your local bank or to get more information about the application.
If you bring enough change with you and can buy your new dream house cash, this whole process becomes simplified. Because most of the requirements come from the lender.
Again, it is wise to hire a realtor to learn about local laws and characteristics, as well as for negotiating, drafting the offer, or getting an appraisal. If you decide to work without an agent, all you have to do is find the closing agent to handle the closing.
The process of a purchase without financing usually looks like this:
Find Closing Agent
Complete Offer to Purchase
Perform inspection & appraisal (optional)
Get insurance (optional)
When buying (and selling) real estate in the US as a non-US citizen, there are a few things to keep in mind to avoid falling into the big tax trap.
Like any homeowner in the US, you owe property tax on your property. The tax invoice is usually sent by mail, so make sure you have entered the correct postal address and have a way of payment.
As a seller, the Withholding Tax (FIRPTA) is also important to keep in mind. When a property is sold by a non-US citizen, the buyer must withhold and pass on a sum of taxes to the state. However, this only applies in some cases (rather with investments) and the difference can be recovered through the US tax return.
Also to be considered as a seller – the capital gains tax. The seller pays additional tax on the profit of the sale.
So – it is best to always and properly file the American tax return, not only to comply with the law, but also to pay only the most necessary taxes.
Especially if the property is not used as a full-time home, it quickly becomes questionable who will take care of the house in the meantime. Administration, repairs, gardening and maintenance work must be organized ahead of time. If the property is located in a storm or severe weather area, there are precautions that must be taken here as well.
There are many Property Management companies that take care of rental properties, landlords and tenants. Rentals of 6-12 months (sometimes shorter) are common in the US – so it would be doable to rent out the property for a certain period of the year, thereby letting the management company handle administration and communication. But be careful here again, because taxes are also due on rental income!
Continuous costs and processes must be taken into account. First, it is important to be able to receive necessary mail, and especially bills, on time. Then you have to be able to understand the official documents, because sometimes the foreign language of bureaucracy can make things difficult. And finally, you have to be able to pay the bills, which can also be difficult and expensive internationally.