real estate

Tips for a foreign homebuyer in the U.S.

Steve McLindenq_v2.gifDear Real Estate Adviser,
My uncle is a noncitizen and he wants to buy a home in San Diego. He has heard that if he were to die while still the owner, the government would be owed 50 percent of the property's value. What really happens in the event of the sudden death of the owner?
-- T.

a_v2.gifDear T.,
There are loads of erroneous assumptions about a foreign homebuyer in the U.S. and the tax-seizure rumor is just one of them.

However, under certain circumstances, your uncle or his heirs may be subject to a 10 percent withholding tax not assessed to U.S. citizens at the time of a resale. He also will be obligated to pay U.S. real estate taxes on the home and will need a U.S. Social Security number or individual taxpayer identification number to rent the place to a tenant or to sell it, and possibly to buy it, as some lenders are now requiring a foreign homebuyer to have one.

Know going in that financing could be a challenge. Mortgage qualification standards are more stringent now than at any time in the recent past, particularly for a foreigner homebuyer. Three years ago, your uncle probably could have gotten a home loan if he could produce 20 percent to 25 percent cash down. Today, if mortgage money is available from major national banks to a foreign homebuyer, your uncle may need to put at least 40 percent down when buying a home.

Some community banks and other independent financiers which are doing a little more lending to foreigners on a case-by-case basis may offer slightly better terms. But Realtors are suggesting that foreigners first try to borrow the money in their countries when buying a home in the U.S.

Your uncle also will need to have a valid visa, show proof that he can come and go freely into the U.S. and provide proof of residence of his country of origin.

According to the National Association of Realtors, or NAR, 23 percent of its surveyed agents reported having at least one foreign client in 2009 -- a healthy percentage but still a decrease from 32 percent in 2007. The change is attributable in part to home financing challenges. Whereas 93 percent of all homebuyers in the U.S. financed their home purchase with a mortgage in 2009, about 54 percent of international buyers used a mortgage. The remaining 46 percent of foreign buyers paid cash for their American home, according to NAR. Part of that disparity may be because the credit of foreigners is harder to verify and their countries' credit-reporting systems may not have all the lender-requested information. It also might be because foreigners can't enjoy the tax benefits of mortgage-interest deductions or other local tax benefits such as state homestead exemptions.

For his purchase, your uncle should seek out a buyer's real estate agent who has substantial experience with foreign homebuyers. That should help him cut through the cultural and transactional challenges of buying a home in the U.S. Because of Southern California's international appeal, San Diego should have a multitude of agents capable of bridging this gap.

I would strongly suggest the employment of a U.S. real estate attorney as well to carefully walk your uncle through the various tax and legal nuances. (A side note: Buyers who live outside of the U.S. may face a problem getting documents notarized and may have to go through the U.S. Embassy to do it, making an appointment well in advance.)

Good luck to your uncle in his U.S. home purchase.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more Real Estate Adviser columns and more stories about mortgages. To ask a question of the Real Estate Adviser, go to the "Ask the Experts" page, and select "Buying, selling a home" as the topic.

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