As you know, one of the main components of the American dream is nothing but your own home. It’s no secret that the United States of America is among the most profitable countries in the field of lending, especially mortgage. Low interest rates on loans, loyal attitude to borrowers and a high standard of living in the country allow Americans to take loans without thinking about the multi-year burden of its repayment.
First of all, let’s understand the concepts of mortgage, mortgage lending and credit secured by real estate.
Wanting to buy a house, and not having the financial opportunity for it, you go to the bank for a targeted loan – to buy real estate. In this case, the mortgage is the house itself, as a pledge to the bank for the loan granted to you for its purchase, or for the purchase of other housing as a pledge of your real estate. When registering such a transaction, the mortgage object will be officially entered in the register of rights to real estate, and information on the status of real estate “under pledge” will become public. Until you fully repay the loan, the property will be documented by the mortgagee – the bank, and formally by you. A mortgage loan is a type of loan in which money is provided for the purchase of real estate.
A bank transaction in granting you a consumer loan, for example, to buy a car, as a pledge of your real estate (of which you are the owner), will be considered a “loan secured by real estate”.
The average market value of a five-room house varies in different states from 60 to 150 thousand dollars (read: Average cost of real estate in the USA). Despite the fairly affordable housing prices, many Americans, not wanting to spread a single payment the amount of property value, take a mortgage for a period of 30 years. This makes it possible to monthly give a minimum part of their income to repay the loan, and not to remain in conditions of austerity. Of course, in the aggregate, the amount paid on interest for such a huge period of time will significantly exceed the interest on the loan for a period of 10 years. Mortgage for a period of 30 years with a 5-interest rate will cost the borrower twice the amount of the property value. This is explained by the fact that a client, by monthly making a small amount on a loan, pays almost one percent, without reducing the size of the loan body. The borrower has the right to make a monthly payment several times higher than specified in the contract.
What is a mortgage?
In the US, real estate loans are called “mortgages”, which literally translates as mortgages. At the same time, mortgage can be either with a fixed interest rate – Fixed-Rate Mortgage (FRM) or floating-rate – Adjustable-Rate Mortgage (ARM).
What is the interest rate on real estate loans in the USA?
Americans are always faced with the choice of which version of the “mortgeeg” will be more profitable for them. The size of floating interestThe rates are always lower than the fixed ones (by 1-2%), but they are significantly affected by conditions related to the state of the US economy at the time the bank revises the rate. Taking such a mortgage, the borrower kind of “plays roulette” with an interest rate, and is not able to distribute their expenses in the future. Depending on the conditions of such a loan, the floating interest rate may not change in the first 3, 5, 7 years (3ARM, 5ARM, 7ARM) from the moment of registration of the mortgage, after which it can be raised to the boundary values (CAP), for example, from the initial 3 % to 7%, of which 4% will be CAP. At the end of a fixed period, the bank will review the rate annually until the borrower fully repays the loan, and in extremely rare cases, downward. This type of mortgage is preferred by those who are planning to repay the loan in a short period of time. The rates for such a loan on average vary from 3.1% to 4.5%. Today, the rate on five-year mortgage loans (ARM) averages 2.85%.
The option of a mortgage with a fixed interest rate , due to the absence of risks, is increasingly attracting Americans. It is used by 75% of borrowers. Often, potential property buyers are waiting for the moment of economic stability in the country, at which the size of the FRM rate is not too high and the entire crediting period is paid at a lower interest rate.
90% of Americans wanting to buy property on credit choose a mortgage for a period of 30 years with a fixed interest rate. The average rate on such a loan at the beginning of 2016 is 3.72%.
Let’s give an example. Taking a mortgage of $ 200 thousand. for a period of 15 years, with an interest rate of 3.23%, the final payment of the borrower will be 252 thousand dollars, for a period of 30 years with an interest rate of 4.5% – 365 thousand dollars. Over 90 percent of all real estate transactions in the United States account for a mortgage. At the same time, in Russia and Ukraine no more than 10% of buyers use mortgages.
In addition to favorable credit conditions, the US state provides its citizens with the opportunity to refinance a mortgage (repaying the loan balance by processing a loan in another bank with a lower interest rate), and also creates all kinds of mortgage lending programs for low-income citizens, veterans, and victims of disasters pensioners, citizens using energy-saving systems, etc.
Of the main features of the mortgage in the US are the following:
- Low interest rate. Of all types of loans, the mortgage has the lowest interest rate. This is explained by the fact that mortgages are often issued for a long term – 30 years.
- Primary and secondary real estate markets. As is known, Russian and Ukrainian banks are not willing to take on mortgage deals in new buildings due to the risk of construction in progress.At the same time, there are no such risks in the USA, therefore, banks willingly take on any transactions, both with secondary housing, and with that which is in the process of construction.
- High competition. Due to the fact that the mortgage is very popular in the United States, each of the banks is trying to keep his client. Therefore, such lending is available to many segments of the population. In extremely rare cases, borrowers are refused.
- Accounting for customer income. When considering an application for the issuance of a mortgage, US banks take into account not only the client’s income from wages, but any of his personal savings, including pension, as well as dividends, and rental income.
- An initial fee. The size of the initial payment is 10-50%, but in some programs of the bank such obligations are completely absent.
To borrow real estate in the United States can people over 25 years old, but not older than 75 years.
Is there a chance for foreigners to take a mortgage in the US?
US banks are reluctant to contact foreign customers, including citizens of CIS countries, citing a high level of risk. One of the weighty arguments to provide you a mortgage loan is a letter of trust from the world’s largest bank, in which you must be positioned as a paying customer.
The first thing you need to do to get a mortgage is to open an account in a US bank in the United States (the term of registration from 14 to 30 days). There must be enough funds in the account to make a down payment, pay bills for the transaction and additional reserve. The amount of the reserve should not be less than the amount of 12 monthly mortgage payments, property insurance, valuation of the acquired property, all taxes and fees that are paid during the transaction.
You will also need a letter of recommendation from a bank that is located in your home country and in which you have an account for at least two years. In addition, cash must match your annual income, which you must also confirm in writing.
The documents required by the bank include: a passport, a copy of an open visa (Green Card, work visa), credit history, documentary evidence of your place of residence (for example, receipts for the payment of utilities).
The bank can give you a loan of $ 100 thousand. up to $ 20 million, with an initial contribution of up to 30%, which is significantly higher than for US citizens. The average loan processing period is 45 days.
Foreigners (with an open US visa) can get a mortgage loan remotely. The procedure for processing such a transaction will require the involvement of a lawyer or an organization specializing in processing such transactions to foreigners. All necessary certificates and letters are sent by mail, with the mandatory certification of them in the US consulate (in your country).
The interest rate on a mortgage loan for foreigners is higher than for US citizens, and is 5-7% (and in some banks up to 8-10%).
In this article, we looked only at the tip of the iceberg of the US mortgage lending system, so we want to draw your attention to the fact that without the help of an experienced specialist, a foreigner in this area will be very difficult to figure out.