If you are Canadian and wondering whether you can buy an investment property or your dream winter getaway, we've got good news.
There are multiple financing options available to you.
Here's what to expect:
The application
As with any mortgage, lenders rely on a full application.
Your Canadian credit report is also typically required. Alternatively, lenders may ask for a bank reference letter in order to verify your assets and liabilities in Canada.
Lenders will sometimes request "reserves" as well. Reserves are basically spare funds you keep on deposit. This mitigates some of the lender's risk, giving them more comfort that you'll have enough funds to make your mortgage payment, property taxes, property insurance and condo fees as applicable.
When submitting documents, be sure to provide everything requested as soon as you can. And keep a record of when you sent it. If you email documents, request a read receipt as proof of sending. Continue to follow up on your document status until the lender or broker gives you written confirmation that you've satisfied their conditions.
The bank will call to verify employment and do a final audit before closing. As a result, it is imperative that your financial status does not change from the time you apply until after you close. In other words, be a steady Eddy. No big purchases, missed payments or job changes during this time.
Remember that application turnaround times take longer in the U.S. than Canada. That's especially true in high season, such as winter in Florida. At peak season, lenders, appraisers and title companies are running at full throttle. As a result, when putting in an offer, leave yourself at least 45-60 days to close on your purchase.
Interest rates on U.S. financing for Canadians
Terms in the U.S are different than Canada. Whereas Canadians are most used to 5-year fixed and 5-year variable terms, the most common mortgage in America is the 30-year fixed.
When a lender commits to loaning you money at a guaranteed rate for 30 yrs, its rates must be higher to account for the term premium demanded by investors. U.S. 30-year fixed rates are often at least one percentage point higher than 5-year fixed rates in Canada.
Mortgage rates also follow bond yields far more closely in the U.S. because so much funding is tied to the bond market there. The #1 leading indicator of American mortgage rates is the 10-year Treasury bond.
Another difference you should expect is the rate premium that applies to secondary properties. If your U.S. property is not your primary residence, lenders are a slight risk premium. They do this because they figure that you're less likely to keep making payments on the home you don't live in if times get tough.
Rate holds and pre-approvals
In the U.S. rates are typically not held until a mortgage application is officially submitted to the lender, conditionally "approved" and you've signed a "rate lock" agreement.
This is different than how it works in Canada. There, as long as the deal is submitted with a timestamp and the deal is approved, the rate is held.
As a Canadian, it's also not possible to get a pre-approval rate hold in most cases. This means that if you apply and rates go up before you find a home and get a conditional approval and rate lock, your rate could change.
Of course, there are numerous Canadian banks that finance second homes in the U.S. Working directly with such banks can seem advantageous. Keep in mind however, that:
- local lenders often offer preferrable terms
- if your application is declined, you have to start a new application all over again elsewhere
- by choosing only one specific lender, you eliminate other options that could be better suited to your personal scenario.
That's why working with a broker, who has access to a variety of competitive foreign national programs from different lenders, put you in a position of certainty.
A broker also works for you and not the bank, so the service tends to be faster and more personalized.
Other considerations
A few parting tips:
- Be prepared to put down at least 20% for the "earnest money", A.K.A down payment. It is recommended that you set aside 3% for closing costs such as legal fees, appraisal, etc.
- Be prepared to pay a higher amount for insurance in some states, such as Florida, to offset the higher risk of natural disaster.
- Depending where you buy (e.g., Florida), the seller typically pays a state stamp tax. This is similiar to the land transfer tax in most Canadian provinces.
- Consider if you will be in the U.S. or in Canada for the closing of the property. This is critical as some lenders require that you are in the country to close.
For questions on the process or to get a rate quote, email us anytime at info@hulifinancial.com.