What do international home buyers need to know about financing a real estate purchase in the United States?
Many of my relocation clients come to Silicon Valley from outside of the U.S. For them, financing a home purchase may be a big concern. There are many questions about down payment amounts required, moving money to the United States from abroad, purchasing without a regular credit history here, and many more.
I thought it would be helpful to get some lending and finance information to my global readers and have interviewed Allen Liang, a private mortgage banker with Wells Fargo Home Mortgage, a very experienced and knowledgeable lender who has worked extensively with global clients and can speak to these issues authoritatively. Below please find my questions and his answers.
How difficult is it for international home buyers to get financing in today’s market?
Lending to international home buyers is not as hard as many people think. Most international home buyers are well qualified buyers. Due to a lack of credit history and income verification system different than in the U.S., the lender normally does require more documents. With a thorough interview and well prepared paperwork, we can help international buyers obtain the mortgage in the U.S. However, the processing of international home buyers’ loans might take a slightly longer time to process. I highly suggest starting the paper work as early as possible, so we can get them pre-approved by the underwriter. Continue reading
Is it a good idea for newcomers to Silicon Valley to rent for a year, or smarter for them to purchase right away? Normally, I would suggest deciding where you want to live generally (example, Almaden area of San Jose 95120) and renting there for a bit first just to make sure it’s where you want to be. This is especially true if you have children who will be in public schools, as it can be rough on them if they change again once you’ve been here for awhile. Renting first enables you to learn the area and takes some pressure off. Also, it can take some time to move money from overseas for your down payment, so the little extra time can help there, too.
However, many people want to buy immediately and will make several trips here before the move to find and purchase a home. Often this is because they see the value in owning (tax benefits, getting kids into certain schools). I’ve had many people tell me that it helps them to establish themselves in their new community faster if they buy rather than rent.
Right now interest rates are very favorable. Lawrence Yue, the chief economist for the National Association of Realtors, recently stated at our annual conference in San Francisco that he’s expecting interest rates to go as high as 5.4% by the end of 2014 (as of right now, it’s hovering between 4.125 and 4.25%).
What does this rise in interest rates mean in terms of housing affordability?
$500,000 mortgage, 30 year fixed at 4.25% = monthly payment of $2459
$500,000 mortgage, 30 year fixed at 5.4% = monthly payment of $2807
Difference = $348, or a 14% increase in the monthly payment
Or, let’s look at it in terms of buying power.
$2500 mortgage payment, 30 year term at 4.25% = loan amount of $508,192
$2500 mortgage payment, 30 year term at 5.4% = loan amount of $445,211
If the interest rate goes up to the 5.4% that the NAR chief economist expects, that cuts into the buying power of a $2500 payment to the tune of almost $63,000.
For most people, the cost of waiting is a significant factor in this buy vs rent decision. My concern is that many people who elect to lease or rent for a year do not understand the risk that may accompany waiting. For most folks relocating to the San Jose or Peninsula area, the hardest thing to manage is the cost of housing. This could become substantially worse by putting off the purchase for a year, so right now I cannot recommend doing that. The low interest rates are a gift that won’t be around forever.
Want more info? Please see my Valley of Heart’s Delight blog, with the related article
How will rising interest rates impact your home buying power?
If you want to buy a Silicon Valley home and you’re coming from outside of the area, a few things are done differently here. Rather than give a lengthy explanation, I’ll just provide a quick list of things which are different from other parts of California, the U.S. or perhaps the world.
- The escrow account, where money is held and disbursed by a neutral third party, is ordinarily with a title company in Silicon Valley and the San Francisco Bay Area generally. In CA it’s legal for real estate brokers to have the escrow account, but that is not the custom here. By contrast, in southern Calif., there are separate companies which often do the escrow work or a real estate broker may handle the funds, called trust funds.
- Santa Clara County is a “seller pay county” by tradition when it comes to the escrow fee and who pays the owner’s policy of title insurance. (Most of California is either buyer pay or split 50/50. Also, SCC is where San Jose and much of Silicon Valley is located.)
- Because it’s a “seller pay” county, the seller or the listing agent (the seller’s real estate agent) normally chooses the title company. Most of the time, the home owners do not have a preference and don’t know anyone working at the nearby title companies, so usually the listing agent suggests which one to utilize. If you purchase the property with a loan, you will need to buy lender’s insurance, too – and that’s a buyer cost.
- While in many east coast states an attorney is involved with the home buying and selling process, here lawyers are seldom involved with real estate sales – unless there is a big problem.
- Surveys are not usually part of the transaction here, with exceptions if there are serious doubts about the property boundaries.
- Buyers are provided information on natural hazards, and usually also known environmental hazards and area tax liabilities, in most cases via a professional disclosure company such as JCP Disclosures. Things such as 100 year flood plains, liquifaction zones, earthquake fault lines, underground water contamination will be revealed, if known, in most cases.
- In some parts of the world, buyers do not have their own real estate professionals for guidance and advocacy, but here they do. Most of the time, in the San Jose and Peninsula area buyers have their own real estate agent working on their behalf. Usually the buyers’ agents are paid by the sellers – but they do not represent the sellers. Dual agency is legal in California as long as it is disclosed (and dual agency can mean either the same person or brokerage).
- In recent years, it has become the norm to get pre-approved with a lender or bank prior to writing a purchase offer on a house, condo or other home. (If you meet with a Realtor, getting you set up with a reputable lender will be one of the first things he or she asks you to do.) Also it’s pretty normal to have to provide “proof of funds” to demonstrate that you have the down payment available. Sometimes our international clients are surprised at the documentation required here, so it’s good if you are aware of it upfront.
- It usually takes 30-45 days to close escrow on a property here (from the time the sellers accept your contract to the time you actually own it).
- Finally, it should be noted that the cost of housing in Silicon Valley is truly exorbitant. Most people know that Silicon Valley houses are very expensive, but until they get out and see what things cost, they really don’t understand how extreme it is. Often I tell people to expect to pay twice as much and to get half as much. Unless you are coming from a pricey locale, such as London, Tokyo, Paris, Manhattan or Boston, you may still find yourself in “sticker shock”. A half million dollars buys a fairly small, modest home here, in an average area. A million dollars is better – you can get into a better area and better house. The “luxury market” starts somewhere between 1.5 and 2.5 million, depending on which area you’re considering.
Each January, would be home owners roll up their sleeves and make plans to buy a house, townhouse or condo. This year, like most, I’m getting contacted by Silicon Valley home buyers new to me as well as those who played with the idea in the past but ended up putting off the purchase. (Recently I learned that nationally, only about 50% of interested home buyers actually do purchase during the year that they think they will.)
Right now it is a very deep seller’s market in Santa Clara County as well as nearby areas of Silicon Valley. There is more demand than supply, the majority of “regular sale” properties under $ 1 million or so are getting multiple offers and the sales prices are averaging over the list price in almost all neighborhoods. The months supply of inventory is less than one month in Santa Clara County right now.
There are a lot of strategies you can employ when competing in multiple offer situations, but very few things can trump cash. A 20% down payment is considered a minimum for most of the valley. It is extremely difficult for a home buyer with FHA backed financing to buy a home in most cases.
This morning I looked at the sales of houses in San Jose over the last 30 days (meaning those which closed escrow). There were 368 houses that sold & closed. Of those 268 had conventional loans, 77 were all cash, 10 were FHA, 6 were conventional 1st and 2nd, 1 was a VA loan and none were “owner carry”. In other words, the vast majority had 20% down or more, and only a tiny handful came to the table with a small down payment.
That doesn’t mean that FHA buyers are never successful or that they aren’t trying. But the odds of success are about 3%.
Looking for another option? There are conventional 1st and second loans available – of course not many of those either but they are usually viewed more favorably than an FHA offer, especially if the house is older or needs work.
Another strategy may be to cosign with a relative who puts up a 2nd mortgage for you.
Nothing can really beat cash, and for most buyers, that means saving for years to pull together that elusive 20%. Up against an all cash bid, even 20% will look weak, but to increase your odds of success, 20% should be your minimum target in today’s market.
First, you need to understand that possibly more than in any other time, it’s a deep seller’s market, meaning you most likely will be competing against multiple offers. Homes for sale are not as abundant as normal, and there are a lot of buyers trying to purchase a house or condo in the San Jose area. Not enough supply, too much demand equals multiple offers and rising prices. (You can check the current Santa Clara County real estate market statistics at www.popehandy.rereport.com.)
Secondly,if you want a chance at buying a property in Santa Clara or San Mateo Counties, you must have a great “offer package”. It is imperative that you have a solid down payment, 20% is a minimum but often it takes 25% or more to convince sellers that they should take your offer over the others. Cash is king and you may get out bid by an all cash offer, especially if it’s also a non contingent offer.
If you include any contingencies for inspections, loan and appraisal, they will have to be fairly short to compete in multiple offers. A 17 day loan contingency is a pretty sure fire way to get eliminated from multiple bids.
Continue reading on the Valley of Hearts Delight blog:
Moving to Silicon Valley: is it possible to get a house here that’s as nice as the one you currently own?
I am frequently contacted by extremely bright, successful engineers or high tech professionals who are in large homes on large lots with great schools in less expensive areas of the country. They want to move here because Silicon Valley is the hub of innovation, our weather's great, crime's low and there's so much to do in this region. They know that housing costs here are extraordinarily high, but they hope that the salaries are commensurately high such that they can replicate the home & lifestyle they currently have – but put it here.
But that really doesn't work. Unless someone's relocating here from Boston, New York, Tokyo or Paris (or somewhere equally astronomically priced), the salary offered in Silicon Valley will not usually make that kind of housing duplication possible.
To move here normally means downgrading the house and paying more for it. Yes, incomes are a little higher but not nearly enough to match the discrepancy in real estate prices. I tell people, as a rule of thumb, that when you move here you will pay twice as much and get half as much. (Salaries? You get a little more. Not twice.)
Sometimes I get the comment "I don't want to move to Silicon Valley and have my family's lifestyle negatively impacted by having to live in a smaller house. I want the quality of life to go up, not down."
That is completely understandable. People who move here don't do it because of housing. Lifestyle often is better here. Shoveling snow? Forgetaboutit. We have 300 sunny days a year on average – if you love to be outdoors, your lifestyle will be far better here where the weather is subtropical. We have the Pacific Ocean an hour or less away, San Francisco an hour away, about 2 dozen wineries, theatre, museums, the Sharks, parks and trails. Our population is highly diverse and highly educated. Crime is low. There are a thousand reasons why the lifestyle here probably is far better than in other parts of the country… but it's not if you equivocate housing with lifestyle.
Yesterday I was asked how the San Jose – Silicon Valley area is different from other parts of the US for home buyers. What did they need to be concerned about here versus in the midwest or east coast? They knew about earthquakes, and having to strap water heaters for earthquake safety, but what about earthquake insurance? Are termites a problem here? What things should home buyers worry about here that perhaps are not issues elsewhere?
I thought that this was a great question. Here are the big areas that come to mind:
- Earthquakes (of course) and everything related: selling requirements, insurance questions, related natural hazard zones (liquifaction zones, landslide areas, etc.), where fault lines are located, etc. People moving to California generally know that they need to be concerned about seismic occurrences, but perhaps not all the related areas.
- Expansive clay soils: when you read your history, you may have heard that in early California, homes were made of adobe bricks. What may not have been clear is how strong that soil is. I have a couple of blog posts on my Valley of Hearts Delight blog on this topic:
Cracked Foundations, Adobe Clay Soils and Water in Silicon ValleyWhat To Consider When Buying a Hillside Home in Silicon Valley
Termites: in general, there are 2 types of these pests active on the valley floor: drywood termites and subterranean termites. (In the Los Gatos Mountains and closer to the Pacific Ocean you may also encounter dampwood termites.) It may be possible to try to prevent subterranean termites with bait stakes placed underground, but there is no way to prevent drywood termites. You can fumigate your home and within a few days they could be back (but won’t be visible for a year or two at the earliest in most cases). Termites do better here than in many places of the country simply because it’s warmer here. They may swarm twice a year rather than once. Please also read this post for more info:
- No basements – there are very few homes with basements here (the very old ones and those which are newer and extremely expensive). A very common question is “where do people store all their stuff if they don’t have a basement?” For most households, the storage center tends to be the garage. Built in cabinets and storage shelves are highly appreciated. When people purchase homes with 3 car garages, often that 3rd space is not for a car, but for “stuff” – luggage, holiday decor, momentos, old files, etc.
- Foundations – older homes are usually built on a “raised” foundation or perimeter foundation with support beams under the center part of the home. Some types of homes, such as Eichler designed houses (mid-century modern ranch style) were built with slab foundations and actually have radiant heating (heating coils built into the slab). Newer homes now tend to be built on slab also (10-15 years of age or less). Most of our valley has 40-60 year old ranch style homes, though, and these are mostly “raised” foundations with a crawl space.
- Houses are built to move in case of an earthquake – most of our homes are built with wood and are intended to move in the case of an earthquake. It is very rare to find a house made out of brick here because they don’t do well in case of severe shaking.
These are perhaps the most salient differences home buyers relocating to Silicon Valley might want to be aware of. For each of these points, there are things to learn and red flags to watch for.