New York Property – Mortgage Financing For Overseas Buyers
Posted by Wei Min Tan on July 29, 2020
Mortgage financing for overseas buyers of Manhattan property is a niche specialization. The financially savvy who want to benefit from leverage will choose financing. Meanwhile, many of our overseas clients buying property in Manhattan, New York pay in cash. This is either because of personal preference, better negotiation advantage or because they have a cheaper source of financing from their home country (which allows them to close in cash in New York).
During the Great Recession of 2007-2009, the major banks stopped lending to foreigners. Banks have since opened up to lending to foreigners again. Nevertheless, foreign buyer lending remains a very niche market. Even if a lender has a foreigner program, the bank officer handling the loan needs to be very experienced. Otherwise, the loan falls victim to endless bureaucracy within the bank.
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Higher downpayment and rate for overseas/foreign buyers
Loans to foreign buyers typically require a higher down payment amount, eg 40 percent, and a higher interest rate, from 25 to 50 bps higher than what a local buyer would pay. Given that, mortgage loans to foreigners would be safer to the banks. It didn’t really make sense that they stopped lending to foreigners but that was the trend back then, to be conservative. The reason was too much reliance on the FICO credit scoring system (which foreigners do not have). But from a property price perspective, the banks are safe unless property values in Manhattan decreased more than 40 percent, the equity downpayment required of foreigners, which is very unlikely.
Mortgage financing and benefit of leverage
Mortgage financing provides the ability to leverage and magnifies returns to the owner. The borrower could then buy more asset with a primary concern being the ability to cover carrying costs. Currently in Manhattan, a 50 percent down payment is needed to be able to have rental income cover carrying costs.
A key differentiation with getting mortgage financing in the U.S. is that here, we have 30-year fixed rate loans. This means the monthly payment stays fixed for 30 years, all this while inflation and rental income increase over time.
Deal example: The Sutton, Midtown East. Clients reserved at pre-construction stage with only 10 percent reservation deposit. Represented multiple buyer clients at the $2 million price point. Project took 2 years to complete. Location and luxury finishes make this a good investment. Close to United Nations, Citigroup Center, Blackstone, Blackrock. Rented at premium rents from the beginning.
Weimin’s article, Buying Manhattan property to rent out
Adjustable Rate Mortgage
Foreign borrowers sometime opt for a 5-year ARM (Adjustable Rate Mortgage) which has a lower rate than a 30 year fixed, but only for the first 5 years. The rationale is that they plan on paying back the loan within 5 years.
Getting a mortgage loan not dependent on age
Getting a loan is not dependent on the borrower’s age (because that is illegal by U.S. laws). The banks would look at the borrower’s income, debt-to-income ratio, global assets and down payment amount.
Experience of the loan officer
It is very important to work with the right banker within the bank. For example, calling HSBC and speaking to someone at random doesn’t mean that banker is the right match. Reason is that you want a banker who has worked on many deals with foreign buyers, not someone who just learned the foreign buyer program last month.
An experienced banker makes the process much smoother. He would have the right relationships to push the loan through efficiently because getting a commitment letter within the agreed upon time (in the contract) is extremely important. This is why we always recommend the client work with an experienced banker. We would provide references to bankers as well.
Deal example: 200 Chambers Street. Luxury building in Tribeca with premium price and rents. The low carrying costs and high demand make this a good investment. Located next to Whole Foods, World Trade Center, Goldman Sachs headquarters. This apartment faces the building’s zen garden and comes with a washer/dryer within the apartment.
Bottom line
Of course, the bank’s main concern is the borrower’s ability to cover monthly debt obligations. This is why the debt-to-income ratio is important. But being high-net-worth individuals, our clients who opt for mortgage financing have always successfully gotten a mortgage here in the U.S.
What We Do
We focus on global investors buying Manhattan condos for portfolio diversification and long term return-on-investment.
1) Identify the right buy based on objectives
2) Manage the buy process
3) Rent out the property
4) Manage tenants
5) Market the property at the eventual sale
Deal example: Parc Vendome, Midtown West. A value buy but required renovation of the entire apartment. Apartments requiring renovations in Manhattan are more time consuming because of licensing/permits/limited elevator usage etc. The buy decision based on southern exposure with plenty of light and proximity to Central Park. Rented out immediately after renovation project was completed.
Notes:
Article updated July 29, 2020
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