March 8, 2010 - It's no surprise that the U.S. housing market was hit a lot harder than it was up here in Canada. It's not uncommon on the vast multitude of websites advertising short sales (or what is referred to as power of sale in Canada) to see great homes selling for under $100,000, particularly in the sunny southern states.
  
A lot of Canadians are well aware of this and have been aggressively seeking to profit from the unprecedented soft market. Just ask Patrick Sheridan, a mortgage loan officer with a Royal Bank of Canada (RBC) branch in Tampa, Florida.
 
"I would say that 80 to 90 per cent of the people I deal with down here are Canadian," he says. "Our mortgage people in Canada do not do U.S. mortgages so they have them contact us down here."
 
And while he agrees the prices on homes are some of the lowest the country has seen in years, so is the amount of lenders willing to work with Canadians.
 
"I'm usually one for making some exceptions when it comes to lending, but I can also see where the banks are coming from as far as risk management is concerned," he says. "Ideally we should be somewhere in the middle of low risk on one side and making exceptions on the other, but unfortunately we're leaning way towards the safe side."
 
That may explain why interest in the U.S. real estate market is waning, according to the U.S. based National Association of Realtors (NAR) in its 2009 profile of international home-buying activity. While Canadians account for the most foreign home ownership in the U.S. market, that number is down from 24 per cent in 2008 to 17.6 per cent this year.
 
The NAR also cited that 33.9 per cent of foreign owners bought in the U.S. for the purpose of having a vacation home, while 23.5 per cent bought to have a vacation/investment property, 18.3 per cent to strictly have a residential rental property, and 3.5 per cent for a commercial investment.
 
Those numbers don't come as a surprise to anyone that CRE contacted for this article, as the lending landscape is vastly different from even a few months ago. At the moment, to say loans for real estate investors without U.S. credit history are soft would be a gross understatement. Elusive would be more appropriate.
 
Where's the money?

When CRE contacted mortgage loan specialists from all types of lenders across the U.S., the most common answer to our question, "how can Canadian investors get a U.S. mortgage?" was along the lines of what Chase Brodsky, a mortgage broker with LynxBanc Mortgage Corp, says.
 
"We haven't serviced loans for Canadians in about six months. There is simply no financing and I don't even know what the current options are."
 
While LynxBank used to deal in mortgages for foreign nationals in 12 states, the current climate has had it completely shut down that aspect of its business.
 
One of the easiest options, if you have equity in your Canadian home, is to take out a line of credit and bring that cash down to the U.S.
 
"I'm the first person to say to borrow Canadian money against your home," says Sheridan, before adding that "the bank is fairly conservative, which is why we're not lending for investment properties."
  
Fred Molson, a broker with Prudential Florida Realty, agrees, saying that "unless you convert your money and come with cash to the States it really doesn't make sense. Even if you could get a mortgage down here, the value of the Canadian dollar fluctuates so much that all of a sudden it's costing you that much more to pay it off. If you took an equity line of credit then you're always paying off in Canadian, but in this case it would have to be 100 per cent cash down."
 
But if this isn't an option for you, not all is lost. Although the market for lending in real estate that is for strictly investment purposes has dried up, the appetite is still there for second homes that can be rented for up to six months of the year.
 
Tamra Treanor, another mortgage loan officer with RBC, says that for loans in the eastern half of the U.S., a second home mortgage with 25 per cent down is fairly common. Unfortunately some guideline changes have moved RBC out of the West completely and she couldn't say for sure when they would be lending there again.
 
"That means no Arizona, no Nevada and no California unless the client has established U.S. credit," she says.  
 
With RBC, the stipulation for the second home mortgage is that it can't be rented for more than six months of the year, and it can't appear to be only a cash-generating property (i.e. you have to live there at some point in the year).
 
"Basically, you can't have a property manager that would disable you from moving to the property at any time," she says. "You can do short-term rentals, just no management company can be involved."
 
The case is different, and in some cases even stricter, for other lenders though, such as HSBC.
 
"The property cannot be income-producing whatsoever," says HSBC mortgage specialist Lashaunda Hatton, adding that "You would also have to be an HSBC premiere customer, which means $100,000 on deposit, either by investment account, stocks, bonds or checking and saving. That's first and foremost."
 
With a minimum down payment of 40 per cent, (which can go up to 50 per cent in the West Coast), you can get a 30-year fixed-rate loan on a second home for around five per cent. The five-year adjustable rate mortgage (ARM) option is about 4.25 per cent.

Coming prepared

A year ago, the most popular option for Canadians looking to obtain a U.S. mortgage would have been any U.S. branch of a Canadian bank. Bank of Montreal, which owns Harris Bank in the U.S., and Royal Bank of Canada, which owns RBC Centura, are two well-known examples, but as stated above, RBC has quit lending in the West, and as CRE also learned, Harris Bank, much like HSBC, is winding down its lending to Canadians with an exception for high-end customers.
 
What this means is that before heading to the U.S. to put an offer in on a home, it's best to do some lending research first.
 
"I get a lot of calls from Canadians who are down the garden path with a real estate agent here and the agent didn't even consider getting financing, so they've accepted a contract and suddenly have to find financing," says Maurine Porter, a Realtor who runs Arizona for Canadians with her husband Arnold. Canadian investors themselves, they've taken what they learned from doing it themselves and started a business that focuses on putting together all the details for any clients wishing to get in the U.S. market.
 
"Probably the biggest fallacy for some Canadians is that they think they can go to their Canadian bank and based on that relationship get a loan against a U.S. property, which is not the case," says Arnold.  "A lot of people also assume, 'oh, Re/Max is here, Coldwell banker is here, we'll just contact an agent when we come down'. That's fine until it comes to getting financing."
 
They suggest getting what is called a "loan status report" from a bank beforehand. "It's generated from the bank and that's good enough for a seller to say 'we've looked at these guys, they look good and we're going fund them," says Arnold, adding that it takes about three days to get one.
 
"A critical factor really is that if someone comes down and wants to make an offer, especially if it's a bank-owned foreclosure property, the bank is going to say they want the loan status report with the offer. The other alternative is to just have cash and show 60 days of bank statements. Then they're in the best position to take advantage of the deals," he says.
 
And the more cash the better, because while 25 per cent down loans do exist, don't be surprised if you're expected to come up with closer to 40 per cent. And as for Canadian mortgage rates, they don't travel south of the border.
 
"We have an in-house lender who is tied to the bank," says Molson, another Canadian Realtor but who has lived in Florida since 1991. "Right now I can tell you she has one lender that will deal with foreign nationals, and it's two per cent above the rate for locals."
 
And you can forget about multiple properties as well. In fact, while most U.S. banks used to lend to a foreign national who already had up to 10 properties, that number is now closer to four.
  
"And that means properties mortgaged, to be clear on that, in Canada," says Sheridan. "Four mortgages, including your primary residence. Regardless of whether you walk on water you are not going to get a fifth property. And even then you can still only buy one second home in the U.S."
 
And while Americans can receive a 30-year fixed product, Canadians are eligible for what is essentially a 30-year ARM loan, with the option for a fixed term of three, five or seven years. After that initial period the rate floats and is based not on prime, but the Libor rate.
 
At the time of writing and with a credit score of at least 710, the three-year started at 5.5 per cent, the five-year at 5.625 per cent and the seven-year at 6.375 per cent.
 
A good rule of thumb is to also expect to pay one per cent of the selling price back in closing fees when no financing is involved and two per cent when financing is involved. 
 
Either way, while the deals may be great in the U.S. right now, unless you can pull together enough cash or borrow in Canada based on the equity in your home, you may find yourself making an offer you can't afford.

From the December 2009 issue of CRE