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One of the biggest hurdles to buying real estate in another country can be coming up with the capital required to close on the purchase. In much of the world, financing isn’t easy to organize. In some places financing is not possible at all for foreign buyers.
That is not to say that financing in a foreign country is out of the question. In fact, you can finance abroad. Here are five options that may be available to you when purchasing property overseas, depending on where you’re buying.
Bank financing. This is the least likely possibility, because financing is not available in most of the world, and certainly not to the extent or with the favorable terms typical in the United States. Even when bank financing is available in a country, restrictions can be placed on bank financing for foreign buyers.
However, when it is available, bank financing could be the best option. Here are four things to keep in mind when considering bank financing for the purchase of real estate in another country:
Loan-to-value ratios may be lower than you are used to, and are typically 50 to 75 percent of the value.
Terms are shorter. A 30-year loan is unheard of.
Interest rates are usually adjustable, rather than fixed.
Some lenders require life insurance to guarantee your loan. This can limit the term of your loan if you’re older, because many insurance companies will insure you only through age 75. Therefore, the best a 60-year-old could expect in a case where insurance is required might be a 15-year loan.
Bank financing for foreigners falls into two general categories: financing for residents in the country where the bank operates and financing for non-residents. If you’re a legal resident, most banks will treat your loan application as they would treat that of a citizen. This means that you’ll need to prove income enough to quality for the loan just as a local citizen would (and just as you would need to do with a U.S. bank). The type of income the bank will require and accept will vary depending on the country. This is something to talk through in detail with the bank.
Non-resident bank financing is much more difficult to find, but not impossible. Foreigners might be eligible to receive financing in Mexico, Panama, the Dominican Republic, Portugal, France and New Zealand. France is a particularly appealing option for bank financing thanks to current interest rates. Non-resident foreign buyers with good credit can access 20-year mortgages at a rate of just 2.25 percent.
Borrowing on your home equity. One of the easiest ways to borrow money for the purchase of property in another country can be to take out a home equity line of credit on property in the United States. This offers a couple of advantages.
The interest rate you pay for a HELOC will be lower than you would be able to get in most foreign countries. A HELOC from a U.S. bank can be as low as 1.9 percent for the intro period, after which the rate can be as low as 4.24 percent fixed for the life of the loan. You won’t find terms that appealing anywhere else in the world.
In addition, the HELOC makes you a cash buyer. This means you can take advantage of any cash discounts offered and be in a better position for negotiation.
A HELOC is a line of credit. You don’t have to use it all if you don’t need it, and you don’t have to borrow it all at once. This works well if you’re making progress payments on a pre-construction purchase. You don’t have to pay interest until you actually use the money.
A traditional second mortgage can also be a possibility if you know how much money you need and if you need most of it at the same time. Otherwise, a second mortgage has all of the other advantages of a HELOC.
And don’t forget the old standby mortgage refinancing. This can be a good option if you’d like to lower your interest rate or change the terms on your first mortgage loan.
Seller financing. Some private sellers might be willing to finance some of the purchase price. The terms will be whatever you and the seller agree on, and a typical term is up to five years. Generally speaking, the longer a piece of property has been for sale, the better terms you’ll be able to negotiate. As with bank financing, don’t expect the seller to deliver the deed until you’ve finished paying off the loan.
Developer financing. In locations where no other financing is available, developers are increasingly offering financing for their foreign buyers. You might be able to receive developer financing in Panama, Nicaragua, Belize, Mexico and Brazil, to name a few examples.
For example, one developer in Mexico has offered what he calls “5-5-5” financing. This means $5,000 down and $500 per month for a term of five years, with a balloon payment at the end, all interest-free. This type of financing is most typical when the developer is just beginning to sell. After a development is selling well, the best financing terms tend to be off the table.
Use your retirement accounts. You might have funds in an individual retirement account or 401(k) plan that could be used for a property purchase overseas. However, there are very specific rules you need to follow when tapping a retirement account to purchase property, and, of course, that cash won’t be available for other retirement expenses.
The IRS limits the amount of a 401(k) loan to $50,000 or 50 percent of your vested account balance, whichever is lower. But if that’s enough for your property purchase and is the best way for you to borrow, you will pay the interest to yourself instead of someone else. Plus, if you take a 401(k) loan to buy property overseas, the property you buy can be used personally.
Courtesy : http://money.usnews.com