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How do mortgages work in the U.S. for Canadian citizens?

It is not uncommon for Canadian citizens living and working in the United States to want to own real estate in the country. Let's take a look at how mortgages work for Canadians in teh US

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How do mortgages work in the U.S. for Canadian citizens?

It is not uncommon for Canadian citizens living and working in the United States to want to own real estate in the country. In fact, for many U.S. citizens, residents and even nonimmigrants, owning a home is one of the key elements of the American dream. The good news is that it is indeed possible for Canadian citizens to enter the real estate market and qualify for U.S. mortgage loans since eligibility is not based on citizenship or residency, but income. That means as long as one has a taxable income in the United States, he or she can apply for a mortgage loan. 

With that in mind, it is important to note that buying a home, whether a vacation home or a rental property, can present certain challenges for non-U.S. citizens. For instance, non-permanent residents are only eligible for Federal Housing Administration (FHA) and other government-backed loans under very strict terms, and so may often have to resort to more traditional lenders. Let’s take a look at how U.S. mortgages work and how Canadian citizens can secure them. 

What types of mortgages are available in the United States?

The U.S. mortgage market is quite developed, though it has traditionally operated in a slightly different way compared to other mortgage markets around the world. The first thing to consider is whether the applicant wants a fixed rate or variable rate mortgage products. 

A fixed-rate mortgage simply means that the interest rate applied on the loan remains the same for the duration of the mortgage agreement. For decades, this was the only type of mortgage available and the repayment period was at 30 years. There didn’t seem to be a need for an alternative since the fixed-rate mortgage offered the stability of relatively low, regular monthly payments. This is in contrast to Canadian mortgages, where such terms would be offered for a much shorter period -- usually up to five years only. Though still possible, it’s become harder to obtain fixed-rate mortgage loans in the U.S. and applicants will usually have to meet strict criteria to do so.

Variable-rate mortgages were introduced in the 1980s and are popularly referred to as Adjustable Rate Mortgages (ARMs). Unlike a fixed rate product, these mortgage loans come with a lower initial interest rate that adjusts annually for the duration of the loan agreement. As such, they can cost more or less depending on the adjustments to the mortgage interest rates. 

At some point during the housing boom, U.S. lenders were offering “creative” adjustable-rate mortgages with shorter reset periods, lower rates and no limits on rate increases in a bid to squeeze even unqualified borrowers into a mortgage loan. This led to a flurry of foreclosures. That’s why it’s important to understand the terms of a mortgage before going all the way in. 

There’s also the hybrid product, which features a fixed-rate setup for a few years before reverting to the ARM product. For instance, you might come across the ‘5/1 ARM’ or ‘3/1 ARM’ products, meaning they come with a fixed rate for five or three years before moving to the adjustable rates.

Different banks and mortgage brokers offer different loan types and not every applicant can access all of the products available. The regulations and products available to foreign nationals tend to vary depending on the state where they want to take out the mortgage. This will also determine the rates, documentation requirements and other processes. As such, it’s a good idea to get some specialist advice so you can fully understand the options available to you.

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Mortgage comparison between the U.S. and Canada 

Canadian citizens will find that there are a number of differences when applying for a mortgage in the U.S. compared to applying in Canada. Keep in mind that these differences have nothing to do with the applicant being a Canadian as the rules are the same for U.S. citizens. Some of the specific differences include:

Mortgage processing and approval times

Mortgage processing and approvals in Canada are typically quicker, taking about 5 -10 days working days. In the U.S. however, the average processing time is 30 - 45 days or even more. You’ll want to plan accordingly.

Documentation

The documents required for a U.S. mortgage are generally more than those for a Canadian mortgage due to the different regulatory requirements. In the case of the latter, basic required documentation includes purchase and sale agreement, confirmation of down payment, proof of income and any other supporting documents. Whereas in the U.S. applicants need to provide their tax returns, bank statements, other investments, insurance documents, Existing mortgage and property statements, among others, in addition to the documents required for Canadian mortgages. 

Mortgage Interest

Mortgage interests in Canada are not tax‑deductible, while in the United States they may be deductible against income tax. These interests are also calculated differently -- fixed-rate mortgages in the U.S. are compounded monthly, whereas they can be compounded semi-annually in Canada. ARM mortgages are available with shorter terms ranging from three to seven years and their interest rates are typically locked in for the first term and will then adjust with the market every year.

Down Payment

Down payments in the U.S. are typically larger with the standard being at least 20% of the value of the home. Investment properties are even higher with a typical down payment of 25%. In Canada, applicants can also expect to shell out around 20% for a conventional mortgage in the absence of a Canada Mortgage and Housing Corporation (CMHC) insurance. With mortgage insurance, however, the down payment can go as low as only 5%. 

Amortization 

As previously mentioned, Canada doesn’t offer anything remotely similar to the 30-year mortgage with locked-in rates that are offered in the United States. Instead, applicants may a 25-year term rate, although the rates are often much higher, so people mostly go for one- to five-year term rates.

Closing Costs

Another important distinction that applicants should prepare for is the closing cost which is around 2.5% - 3% of the purchase price in Canada and is largely driven by land transfer taxes and legal fees and disbursements. In the U.S. closing costs tend to vary and are usually made up of State taxes, title insurance, and a 1% - 3% origination fee. This fee allows applicants to pay off the total amount of the loan at any time without penalty, making it a desirable option for Canadian citizens should the Canadian dollar experience significant growth against the U.S. dollar.

U.S. Mortgage Guidelines for Canadian Citizens

Each lender or broker will have their own guidelines for Canadian citizens looking to take out a mortgage, but generally speaking – here’s what to the expect:

Qualifying for a U.S. Mortgage

To qualify, applicants will need to complete a standard mortgage application and provide all the necessary documentation about their income, credit report, assets and liabilities. A Canadian credit history and proof of income both in Canada and the U.S. are the standard qualification requirements. Once the application and all of the required documentation are submitted, the lender will make a decision on a pre-approval in a couple of days. Once the purchase offer has been accepted, the mortgage processing will take a minimum of 30 days, meaning it is not possible to take ownership quickly unless the applicant opts for a cash purchase. 

Making the Down Payment 

The down payment amount will depend on a number of criteria, including the applicant’s credit score, type of property, and the location of the property. In any case, it is more ideal to make a large enough down payment since it cheapens the monthly payments and interest rates on the mortgage, as well as lowers the expenses incurred on private mortgage insurance. There are various ways to finance the down payment including personal savings and equity from a Canadian property.

U.S. Property Types Available for Mortgage

Applicants may obtain mortgage financing for residential properties whether as a principal residence for permanent residents or as a second home for Canadian snowbirds. They can also take out mortgages for

rental properties used solely for investment purposes and various types of commercial properties. 

Other Expenses

Prepare for additional costs such as application fees, mortgage originations and in some cases, prepayment fees for early payoff. Most U.S. mortgages do not have prepayment fees so the costs are already included upfront and the products are usually fully open, allowing the property owner to pay them off at any time without amercement. Other costs include appraisal fees, inspection and title closing costs.

Home Ownership and Residency Status

The requirements for getting a mortgage loan largely depends on the applicant’s residency status. As a Canadian citizen, you’ll likely fall within one of the following groups:

  • Permanent residents with a valid green card -- This category can obtain U.S. mortgages just like everyone else. They’re even eligible for FHA loans and other notable mortgage lenders like Fannie Mae and Freddie Mac home loans. Applicants will need their green cards and social security numbers.

  • Non-permanent residents with a valid work visa -- If you fall in this group, then you don’t have a green card, but likely have a social security number. You can take out a mortgage if you produce an Employment Authorization Document (work permit) or an employer-sponsored visa, like the L-1 and H-1B visas. Lenders will also have to verify whether you’ll continue living and working in the U.S. for the next couple of years. 

  • “Foreign nationals,” who primarily reside outside the U.S. -- It’s quite harder for people in this group to finance their second home in the United States since they are riskier for lenders. Banks and brokers have to keep these loans on their own books so they typically carry higher interest rates and require much larger down payments. However, there are private lenders who offer these mortgages to foreign nationals. 

  • Refugees or foreigners granted asylum -- People in this category may obtain mortgage financing like a lawful resident alien, provided they can prove their refugee or asylee status. 

FHA mortgages for non-resident aliens

FHA loans are among the most popular mortgages available thanks to their relatively lower credit score requirements and a minimal 3.5% down. The prevailing requirement here is that the applicant provides proof of permanent residency in the U.S. Luckily, the ongoing employment/residency requirement can satisfy this requirement. If you’ve renewed your work permit or visa at least once, then it’s a safe bet that your employment and residency will continue and lenders are more willing to provide the loan. 

On the other hand, if you’ve never renewed your EAD or visa before, the lender may still finance the purchase but will likely investigate further, possibly with the U.S. Citizenship and Immigration Services or your employer.

Lenders to Consider 

Some lenders make applicants jump through additional hoops, such as extra paperwork and various supporting documents before they approve the application. So the first step is finding a lender who will lend to Canadian citizens. Most U.S. banks and other financial institutions may be willing, but it’s best to go for those that also have operations in Canada, or Canadian banks with affiliated U.S. operations. 

There are significant benefits to working with a Canadian affiliated lender, such as enjoying better mortgage rates and relatively faster approval times. 

An alternative is to go for credit unions, many of which tend to offer competitive rates and, depending on the state, may have special lending programs for permanent and non-permanent residents. 

How much can you borrow?

Unless you’re taking out the mortgage for your primary residence, the down payment needed for a U.S. property will generally be higher than what you would have paid as a down payment for your primary residence in Canada. The amount one can borrow will vary based on his or her intended use of the U.S. property. 

If the property is for personal use, then home buyers can generally borrow around 70%  - 80% of the value of the property so they’ll only need around 30% down payment or less. On the other hand, loanable amounts for an investment property could go as high as 60% of the value. 

Important Note: These are just general estimates and should therefore not be taken as absolute mortgage rates. There are many other factors that determine how much a non-U.S. citizen can borrow for a home loan. It is important to consult your realtor and financial adviser before entering the U.S. real estate market. 

Final Thoughts 

Mortgages are a great way for Canadian citizens to acquire U.S. property as long as they meet the requirements and are able to find a suitable lender. Like everything credit related in the United States however, one crucial challenge faced by foreigners is the lack of U.S. credit data. In fact, it’s difficult for foreigners to even obtain credit cards, phone plans and apartment rentals without a U.S. credit score. Alas, it can take years to accumulate enough credit history to generate any score, much less a good one. 

If you recently arrived in the U.S. and need to establish credit, you can apply for a credit card through the Nova Credit Global Credit Passport®. Nova Credit has partnered with credit bureaus in Canada, allowing you to transfer your Canadian credit history to be used for credit card applications in the U.S. There are different types of credit cards available to Canadian citizens, including American Express®, Petal® Visa and Deserve®. Over time, you’ll start to build your U.S. credit history, which is essentially the first step to becoming mortgage-worthy.

You can also use your Credit Passport to apply for other services like student loans, apartment rentals, car leases and internet plans. 

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