Clearing the Credit Hurdle

When it comes to mortgage financing on U.S. properties, domestic buyers have one distinct advantage over global ones: their credit history is easily accessible. Not so with foreign borrowers. Verifying an overseas credit standing can be the make-or-break hurdle to getting a loan and closing a transaction.

Why is documentation so important?

Perhaps you have a global buyer with considerable assets overseas, a steady income stream from employment and investments, extensive dealings in his business community and a solid relationship with his local bank. To you, he seems readily qualified to borrow. A lender, however, will want solid documentation of income, assets, liabilities and past credit dealings, supplied by reliable sources. Without this, they may not be willing to roll the dice.

In the U.S., credit reporting is the cornerstone of mortgage risk assessment. Domestic borrowers must produce credit reports from the three big credit bureaus, Equifax, TransUnion and Experian. No other country, however, has three credit bureaus. Only a handful have one or two and most don’t have any.

Lenders working with foreign nationals have to find alternative ways to assess risk. If an applicant meets the standards, the lender will require a substantial down payment. Loans above $1 million may require 50 percent down. This is because the loan will most likely stay on the lender’s books.

Domestic mortgages can be bundled and securitized on the secondary market, relieving the original lender of default risk. However, a non-resident foreign national’s mortgage doesn’t conform to the same standards and can’t be sold into the secondary market.

Not only does the risk remain with the lender, it will be more difficult to pursue action against a non-resident mortgage holder in case of non-payment. This is why lenders typically require larger down payments and substantial cash reserves held on deposit in the U.S.

Most mortgage lenders to foreign nationals have ways to evaluate risk in the absence of FICO scores so they are comfortable holding the loan. Here are some of the things they look for.

Clearing the CREDIT HURDLE

Existing bank relationship

Given a choice, people generally prefer working with someone whose background is known or can be vouched for, rather than a stranger. Banks think the same way. They like it when a foreign buyer already has an account with one of their overseas branches.

International banks can assess risk by drawing on documentation from their overseas offices. The borrower’s accounts are on file; their assets and liabilities may be documented; their personal relationship with a bank manager can be vouched for. For a global lender, this may overcome lack of a U.S. credit history.

For example, Taiwan-based CTBC (formerly China Trust Bank) makes mortgage loans to overseas buyers though branches in California, New York and New Jersey. A U.S. branch can supplement its risk analysis by tapping the buyer’s financial records from its offshore parent bank.

Other banks with world-wide reach include Citibank with branches in 36 countries, and HSBC, which is represented in 81 countries. If your buyer has a relationship with a big international bank, this may be the best path for obtaining a mortgage.

Alternate ways to assess risk

What if your client buying a second home in the U.S. does not have accounts with a major international bank? Lenders serving this market have their own internal processes for constructing an alternative to a credit bureau report. For instance, HSBC has a proprietary model that uses documentation of an applicant’s income, assets and liabilities that fall outside the U.S., then balances the perceived risk with high down payments and account reserves.

Large banks and wholesale lenders ask overseas applicants for substantial documentation from reliable sources in their home country. (See Commonly Required Documents, left.) They may order international credit reports, mostly available for buyers from the U.K., Ireland and Canada. The process can take weeks and be costly, especially if documents must be professionally translated.

Paper trail in the U.S.

Permanent and non-permanent resident immigrants buying a moderately-priced primary residence are governed by a different set of rules. Depending on their visa status, they may qualify for an FHA-insured mortgage under requirements similar to those set for domestic applicants. (See Non-citizen Requirements Under FHA Guidelines on page 7.)

For immigrants who have not established a credit history in the U.S., FHA-insured mortgages are an attractive option. An added advantage is they can require as little as 3.5 percent down. Community banks in immigrant communities are a good source of information on FHA-insured products. They will have experience working outside the credit bureau arena in non-traditional methods of qualification.

Reaching the finish line

Now that credit is easing, there are mortgage products that can meet the needs of most immigrant and foreign national buyers. The key to qualifying will be how well the applicant can document their sound financial position through sources a lender recognizes as valid.

Loan documentation, however, is also a topic that requires cultural sensitivity. Pointing clients to the best sources for financing requires understanding details about their personal financial situation they may not feel comfortable sharing.

Education can be the best way to make progress. Teach your clients how financing works in the U.S. and which pathways may be most viable. Assisting them with mortgage solutions will help clients appreciate your role as a problem-solver, raise their confidence in working with you and make it easier for them to disclose their personal financial details—initially with you, but in much greater detail with whichever lender they decide to use.

Commonly Required Documents

For second home and luxury purchases, lenders may ask foreign nationals for copies of any of these applicable documents:

• Two years of home country personal tax returns with all pages and schedules
• If self-employed:
  • personal and business tax returns
  • profit and loss statements and balance sheets for the business
• Recent pay stubs
• Letter verifying employment or copy of employment contract
• Letters of reference from creditors
• Two most recent monthly or quarterly statements for all:
  • bank accounts and CDs
  • mutual and stock funds
  • retirement accounts
  • any other liquid assets
• Mortgage statements for all properties owned
• Previous year’s property tax statement
• Current homeowners’ insurance statement showing annual premiums
• Monthly condo or homeowner association fees
• Passport, visa, driver’s license
• Statements from current mortgages
• Possibly international credit reports, depending on origin country
• Individual Taxpayer Identification Number (ITIN)

Asset statements must cover the down payment and closing costs.

Four Things to Ask Foreign Nationals Purchasing Property in the U.S.

1. What visa do you hold?
   • Lenders may not work with holders of some types of visas.
2. Are you buying new construction or a property in a new development/building?
   • Lenders prefer existing homes in established developments
3. Are you buying a condo?
   • Some lenders do not finance condos
   • Others have requirements that affect LTV ratios; if requirements are met, down payments will be lower
     Lenders look at:
     • percentage of sold units
     • limit on how many units are owned by one entity
     • amount of commercial space in the building
4. Do you plan on renting your home off-season?
   • Some lenders don’t allow it. Your buyer may have to sign a affidavit that they will not rent the property.

Non-Citizen Requirements Under FHA Guidelines

Permanent and non-permanent U.S. residents can apply for an FHA-insured mortgage with:

• Social security card
• Evidence of two years steady employment, two to three years of tax returns (non-U.S. acceptable)
• No U.S. credit rating necessary
• Evidence of one year of consistent payment history (rent, utility bills, cell phone, cable, auto insurance, etc.)

However, visa status and terms of ownership are different:

Source: HUD