What to know about getting a U.S. mortgage

Obtaining financing for a U.S. purchase, such as these condos in North Miami, with a mortgage is more attractive now that the loonie has sunk value. (Janice Pinto/The Globe and Mail)

Although Canadians and Americans share the same continent, live across from one another on the world’s longest undefended border and speak, mainly, the same language, there is one undeniable geographical advantage that the United States possesses in abundance: year-round warm weather locales.

This has led many Canadians to think about buying a property in a U.S. hot spot.

The bad news for those buying now includes the precipitous dive in the loonie compared with the U.S. greenback and a rise in home prices in the United States since the market bottom of 2010-11.

With affordability tilting away from Canadian buyers of U.S. property, it has made the traditional all-cash purchase (the way four-fifths of Canadians have paid in the past) less attractive and made taking out a mortgage to finance a purchase a much more desirable option, says Alain Forget, director of sales and business development with RBC Bank, a subsidiary of the Royal Bank of Canada.

“It is not a great time for Canadians to pay cash for a U.S. home,” says Mr. Forget, who is based in Fort Lauderdale, Fla.

“In the past, many Canadians have used cash to buy their U.S. home. However that means using the equity in your Canadian home, cashing out investments or using your savings. With any of these options you’ll have to exchange your Canadian dollars for U.S. dollars, significantly reducing the cash you have to buy your U.S. home.”

Obtaining financing for a purchase with a mortgage means that buyers are not exchanging weak loonies for expensive greenbacks. Mortgages are also attractive given the low interest-rate environment and a Canadian dollar that will remain weak “at least through 2017.”

For Canadians seeking a mortgage in the United States, there are a number of key differences to consider.

– It takes longer. It can take just a few days to apply for and obtain a mortgage in Canada. In the United States, it might take 45 to 60 days to complete the process.

– More documents are required. Getting a U.S. mortgage requires different documentation than in Canada because of different regulatory requirements. For most U.S. mortgages, more than 10 documents are required compared to less than five in Canada, according to RBC.

– There are more fees. Buyers can expect to pay 3 to 5 per cent in fees because of third-party expenses such as property appraisal, titles and certain insurance requirements.

– Interest is calculated differently. U.S. fixed-rate mortgages are compounded monthly whereas in Canada they can be compounded semi-annually for a fixed-rate mortgage and monthly or at the payment frequency for a variable-rate mortgage.

– Down payments are bigger. A down payment of at least 20 per cent of the value of the home is now the U.S. standard. It can fluctuate, however, based on whether the home is a primary residence, second home or an investment property.

– Amortization is longer. Now extinct in Canada, the 30-year mortgage is alive and well in the United States, with the option of locking in rates over that span, a situation all but unheard of in Canada.

“U.S. mortgage products provide much longer rate terms including up to 30 years at very low rates,” says Miles Zimbaluk, director of business development with Canada to Arizona, an organization that helps Canadians who are visiting or living in the Southwest state.

“In Canada, you can obtain a 25-year term rate but rates are much higher, persuading people to nearly always choose one- to five-year term rates.”

He notes that the Canadian buyers are in the main getting younger, which means that more of them are likely to be seeking mortgages rather than putting down cash for purchases.

“We still see a lot of retiree snowbirds buying in Arizona but we are also seeing a lot of younger buyers,” says the mortgage broker, whose company assists Canadian buyers to get in touch with realtors, mortgage lenders and brokers.

“Many are buying vacation homes younger in life either as an investment to take advantage of the still lower priced U.S. real estate, or because they can use the property today and work remotely and enjoy more time abroad before retirement.”

Calgary-based executive Evelyn Studer, who owns three properties in Phoenix, paid cash in every case, although for her most recent purchase, she was turned down for a U.S. mortgage because it was a rental property. “But I could get a mortgage or home equity line of credit on the one house I will be using” as her residence in that state.

So she obtained a U.S. home equity line of credit, which she used to build a pool and make other improvements to her property.

“That was actually a very simple process and not much different than getting a home equity line of credit here in Canada. They just needed a letter of guarantee from my company regarding my present employment amount and title, my last two years tax returns and some financial information on my assets and liabilities.”

Source: Globe and Mail  PAUL BRENT Special to The Globe and Mail Published Friday, Mar. 18, 2016

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