If you are ready to get away from the harsh Canadian winters for sunnier climates down south, buying U.S. real estate may just be for you. Every year, many Canadians are buying homes south of the border for vacation, retirement, or investment - and it’s not as out of reach as you may think. However, though U.S. mortgages share some similarities to Canadian mortgages, there are still big differences between our two countries that you will need to know before you buy anything.
We spoke with Alain Forget, Head of Sales & Business Development at RBC Bank in the U.S. and a fellow Canadian with over 15 years of experience in cross-border banking. RBC bank is the U.S.-based division of the Canadian bank and a national residential lender specializing in helping Canadians to buy cross-border.
“The first message I would like to share is: yes, Canadians can get a U.S. mortgage,” said Forget, “but the process itself can be quite different.”
Forget stresses that it’s important Canadians understand the differences over the border to make their real estate purchase go smoothly and avoid costly mistakes. You may already have purchased a home in Canada and some of that experience will be helpful when buying in the U.S., but in some ways, your preconceived ideas of how mortgages work in Canada can be a hindrance.
Let’s look at the process of attaining a U.S. mortgage and highlight some of the key differences you need to know when buying.
Getting pre-approved for a U.S. mortgage
When it comes to getting approved for a U.S. mortgage, working with the right lender can make all the difference. Many U.S. lenders will not issue mortgages to Canadians as it’s more difficult to verify their eligibility. If they do choose to work with Canadians, you may be charged premiums for the privilege.
The benefit of working with a Canadian-focused lender like RBC Bank, which is a U.S. National Residential Lender dedicated to Canadians, is they can pre-approve your mortgage based on your Canadian credit history/score, income, assets, debts and making things much easier for Canadian buyers. In general, your pre-approval will take three or four days to finalize and is then valid for 120 days.
Your application process
Once you have your pre-approval and you find your dream home under the sun with an approved contract then you can begin your application process in earnest.
One thing that Canadians should be aware of is that a U.S. mortgage can take much longer to finalize than in Canada. In the U.S., it’s normal for the process to take around 35-45 days, and many buyers plan a closing date up to 60 days beyond when they begin their application. This is true for both U.S. residents and foreign buyers, so there is not much you can do to reduce this timeline.
“It's just a slower process down here. It's a bit more of a cumbersome process, but we have to play by the book as a U.S. lender,” says Forget.
In the first seven to ten days of the application process, your lender will work with you to collect information about your assets, liabilities, income, employment status, proof of down payment and more. They may also require additional info you may not have needed for your Canadian mortgages such as bank statements, investment statements, and copies of any other mortgage agreements you may have in the U.S. or Canada.
When it comes to your credit score, the U.S. uses a similar system to Canada and similar scores are required for getting the best mortgages. Generally, a score of around 680 is considered a minimum and 725+ is ideal.
Once your documentation is in order, your mortgage will be packaged by your mortgage advisor and sent to the underwriter for approval. After that, your mortgage advisor will schedule an appraisal which can take some extra time these days as the market is so busy. Finally, it will be time to lock in your mortgage rate and prepare for the closing. With RBC Bank, closings can be done as mail-away (remote) in Canada with a local legal witness for many states (as a few states like California don’t allow for out-of-state closing).
U.S. down payments
Down payments are handled a bit differently in the U.S. than in Canada. In Canada, we have more options when it comes to our down payments, with some buyers being able to go as low as 5% down when purchasing a home.
In the U.S., this is not the case - especially for Foreign Nationals - and all down payments must be 20% at a minimum for primary or second homes. In addition, if you are buying a property strictly for investing as “Non-Owner Occupied” your down payment can be 25% or more.
U.S. mortgage rates, terms, and payments
Mortgages also work a bit differently in the U.S. First, applicants are not required to pass a stress test when applying for a mortgage so you will only need to prove you can afford the mortgage at current rates. Currently, interest rates in the U.S. are slightly higher than in Canada, but the lack of a stress test may actually make them more accessible.
In terms of amortization, most U.S. mortgages will be 30 years, with terms from three to ten years. U.S. mortgages are commonly set up as Adjustable Rate Mortgages (ARM). This means rates are fixed until the end of the first term, converted to an adjustable rate that is updated about every six months to a year. However, since RBC Bank only works with Canadians, when the term expires the lender can renew for a similar or different term at the current rate without closing costs for the renewal.
Finally, one of the benefits of U.S. mortgages besides being in USD is that they are fully open, meaning you can repay as much as you want at any time during the term with no early repayment penalty. This can be a benefit for Canadians looking to mitigate the impacts of currency exchange, repaying larger amounts when the Canadian dollar is in a stronger position.
U.S. closing costs
Closing costs on mortgages are comparable in the U.S. and Canada, though they are handled differently.
Firstly, closing costs will vary by area in the U.S., just like in Canada. These closing costs may include lender fees, bank fees, title insurance, state and local taxes, and more. States like Arizona may have closing costs as low as just under 2%, while a state like California may be closer to 5% and Florida around 3% all-in.
One benefit for Canadian buyers is the fact that closing costs in the U.S. are bundled together and paid by the borrower at closing through the title/escrow agent responsible to facilitate the closing process with all parties involved. For Canadians, this saves you the headache of trying to track down and pay multiple different parties from across the border.
Forget also warns Canadians to be aware of the origination fees and Foreign National Premiums. Some lenders will charge these fees to Canadian buyers and can make a significant difference in the amount of money you pay.
“This is really important for Canadians to understand,” says Forget, urging that when Canadians compare their mortgage options, they need to be sure to “compare apples with apples” as RBC Bank doesn’t charge those extra fees besides the standard lender fees.
Be aware of legal and tax “traps”
Forget stresses that any Canadian looking to buy in the U.S. or any other country should consult with professional legal and tax advisors as early as possible before engaging in this buying process. According to Forget, there are numerous “traps” that can arise from poor decisions along the way, that can result in huge issues down the line.
It’s not uncommon for some Canadians to make costly mistakes when taking advice from friends or peers, but Forget warns: “Sometimes free advice from friends can cost a lot.”
Only a trusted cross-border professional can help you have the peace of mind to avoid any of these traps and ensure you will be able to enjoy your purchase without any unexpected costs.
How RBC Bank can help
Despite being a U.S. institution that must comply with U.S. laws and regulations, RBC Bank does as much as possible to make the U.S. mortgage process as seamless as possible. This begins with pre-approval based on Canadian credit score, a process that may also be completed online quickly and easily. They also offer mortgage terms that are more familiar to Canadians, such as offering their own version of fixed rates mortgages over the more unfamiliar adjustable-rate mortgages that are common in the U.S. Their U.S. team of mortgage advisors only works with Canadians, so they understand the differences well and can provide relevant advice and guidance every step of the way. They are also able to help Canadians with remote or mail-away closing to help facilitate purchases without the need for travel.
Finally, RBC Bank allows Canadians to access a network of external legal and tax professionals who specialize in working with cross-border buyers to make sure everything is processed correctly.
All this and more is accessible through RBC Bank’s HomePlus™ Advantage, a program designed to provide full-service support to Canadians looking to make their U.S. homeowning dreams a reality.