Title: Financing and Buying a Home in the USA: A Comprehensive Guide
Buying a property abroad, whether as a vacation home, investment, or family residence, is an exciting venture. This article aims to address common questions and uncertainties about financing and the buying process, providing important information, vocabulary, risks, and resources. By understanding these factors, foreign buyers can secure financing, be taken seriously by sellers, and successfully complete their home purchase in the USA.
Understanding the Terminology:
Before diving into the financing and buying process, it’s essential to familiarize yourself with some frequently used terms. Here are a few important ones:
An appraisal determines the market value of the property and is often mandatory for financing. It ensures that the property’s value aligns with the selling price, especially for government loans. Deviations in the appraisal can lead to renegotiations. The average cost of an appraisal ranges from $300 to $600.
Closing is the final step in the buying process. During closing, the buyer, their realtor (if hired), and the closing agent meet to sign documents, confirm information, and pay the closing costs. These costs include fees for the lender, attorney, city office, insurance, taxes, appraisal, inspection, and registration. On average, closing costs for the buyer amount to 2-6% of the loan amount, while sellers incur costs of 8-10% of the loan amount.
The closing agent, typically a real estate attorney, ensures the legality and correctness of the purchase transaction. They verify the participation of the buyer, seller, realtor, escrow, title company, and lender. The attorney closing fee, averaging between $600 and $1000, is paid at closing.
Credit Report Fee:
The credit report fee is charged at closing for major purchases. The average cost ranges from $30 to $50.
The debt-to-income ratio determines the eligibility for financing, where the total monthly payments, including car loans, credit card debts, and other loans, shouldn’t exceed 43% of the total income. This percentage may vary slightly depending on the loan provider and the situation.
The deed certifies the owner’s right to claim ownership of the property, specifying the ultimate owner.
The down payment is a portion of the purchase price paid upfront and is not financed by the loan. It demonstrates the buyer’s commitment and responsibility, increasing the likelihood of loan approval. A down payment below 20% often requires private mortgage insurance. While it is rare, obtaining a loan with no down payment is possible.
The earnest money is an amount promised by the buyer to the seller as a sign of serious interest in the property. It is usually credited to the buyer upon closing or refunded if the purchase falls through due to the buyer’s fault.
An escrow account is a third-party account where the borrower pays ongoing real estate costs such as taxes and insurance. A portion of each monthly loan installment goes into the escrow account to ensure timely payments.
FIRPTA Withholding Tax:
The Foreign Investment in Real Property Tax Act (FIRPTA) requires foreign sellers to pay income tax when selling real estate in the United States. Buyers are obligated to withhold 15% of the sales price as taxes and remit it to the state. There are exceptions for properties purchased for residential use or sold below $300,000. Sellers can reclaim overpaid taxes through their US tax return or obtain a Withholding Certificate from the IRS.
Exploring Financing Options:
Foreign buyers can explore various financing options when purchasing a home in the US. It is