When Does Buying a Home In The US Make Sense When You’re On An H-1B Visa?
Despite the uncertainty inherent in being on a work visa, H-1B visa holders may wish to purchase their own home(s) in the US for a variety of reasons.
Reason #1: It may be cheaper to own home vs. rent - if you are in the right city
In most US cities, you can save $300 to $500 a month by buying instead of renting. In some cities with exceptionally high home values, renting is more affordable than making mortgage payments. Examples of these cities include: New York City, San Francisco, San Jose, Seattle, Honolulu or Oakland.
If you’re not sure which option is cheaper for you, use a rent vs. buy calculator to see if you are better off owning your home or renting.
Reason #2: Mortgage interest deduction can reduce your tax liability
Having a mortgage can have significant tax benefits. If you itemize your deductions on your tax return, you can claim the mortgage interest deduction on the first $750K of your mortgage. Take note that the tax savings will only apply if you itemize your deductions. If you are taking the standard deduction, which is $12.2K for single filers and $24..4K for joint filers (in 2019), you can’t itemize and thus can’t take the mortgage interest deduction.
In addition, you can deduct state property and local taxes (SALT) of up to $10K (per the Tax Cuts & Jobs Act until 2025), which include property taxes. Like the mortgage interest deduction, this is only relevant if you itemize.
Reason #3: Mortgage payments are more stable than rent payments
When you live in a rental, your landlord may raise the rent if you want to renew your lease.
If you buy a home, your mortgage payments will be mostly uniform. Even loans that start with an adjustable rate can usually be refinanced to a fixed rate before the rate adjustment schedule. Buying a home reduces the chances of encountering unexpected increases in living costs.*
*There are always unknown expenses when owning a property. Insurance, taxes, and HOA fees can all rise dramatically and unpredictably
Reason #4: Renting means abiding by the property owner’s rules and regulations. When you own, you have more autonomy*
In a rented property, you have to follow the rules imposed by your landlord. You may not be able to keep pets, for instance. You also can’t make major changes in the unit without the approval of your landlord. When you own the property, you have more freedom about how you maintain and change your living space.
*One caveat is that co-ops and homeowners associations can be highly restrictive, sometimes as restrictive as a landlord, in what you can and can’t do with your property.
Reason #5: Owning your home allows you to build equity in a valuable asset
When you pay your mortgage, you are building equity in a valuable asset (your house). In the distant future when you sell your home, you will have accumulated a great deal of equity which can provide you with the money you need to pursue your goals in retirement. There is also an exemption on capital gains from any appreciation you build in a primary residence. According to the IRS, “If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.”
Reason #6: Banks and mortgage lenders offer mortgage financing for H-1B visa workers under similar terms available to US citizens
While it can be a little bit more onerous for H-1B visa holders to get a mortgage, it is certainly possible.
H-1B visa holders can apply for all types of mortgages, including FHA loans, conventional mortgages, and jumbo mortgages.
FHA loans are loans backed by the Federal Housing Administration. In order to get an FHA loan, you must be eligible to work in the US. Aside from your work visa, the FHA also requires an Employment Authorization Document (EAD) if you apply for a loan.
FHA loans are more affordable since you only have to pay a 3.5% down payment if your credit score is at least 580. If your credit score is lower, a 10% down payment is usually required.
Conventional loans are another type of mortgage product. They are backed by the Federal National Mortgage Association, better known as Fannie Mae. Fannie Mae explicitly addresses lending to non-U.S. citizens in their handbook: “Fannie Mae purchases and securitizes mortgages made to non-U.S. citizens who are lawful permanent or non-permanent residents of the United States under the same terms that are available to U.S. citizens.”
Fannie Mae can’t guarantee properties over their loan limit. In 2019, the loan limit for one-unit properties is $484,350 ($726,525 if you are in a high-cost area). Beyond this limit, you may have to look for alternative mortgage products such as the jumbo loan. A jumbo loan is a non-conventional loan that Fannie Mae or Freddie Mac will not guarantee. If you are seeking a jumbo loan, you should have a credit score of at least 700 and meet the following requirements:
Minimum US residency of 5 years
Anticipating sustained employment for the next 3 years
Homes of all types including primary mortgages, vacation homes, and investment properties
You must have an EAD
Most lenders will determine the status of a mortgage applicant on an H-1B visa on a case-by-case basis through the information available to them. Most lenders require the following:
● Valid work visa
● 2 years of US credit history
● 2 years of US employment history
● Good credit score, preferably over 670
● US income that you expect to continue for at least 3 years
● Employment Authorization Document (EAD) issued by the USCIS if you are applying for a loan under the Federal Housing Authority (FHA)
FYI: If you are using foreign currency, the bank may be very conservative in valuing your assets.
Aside from those documents, you will also need to show that you can pay an adequate downpayment of 5-20%. There’s a common misconception that you have to put 20% down for a mortgage. However, 54% of all buyers put down less than 20%. For first time home buyers, only 25% paid a down payment of 20% or more. With these figures, saving for the down payment is easier than some people think. However, if you don’t put down 20%, you will need to pay Primary Mortgage Insurance (PMI) which will add to your monthly payment every month.
If you prefer and have the money, you can also pay for a house in cash and avoid the trouble of mortgage financing.
Related Article: 8 Ways To Get Extra Income While Working On An H-1B Visa
Related Article: How Much Will I Pay In Tax While Working On An H-1B Visa?
What are the best mortgage lenders for H-1B visa holders?
All major US banks offer mortgage loan products although some may not offer mortgage products to non-US citizens. Global banks and larger mortgage lenders are more inclined to have experience lending to H-1B visa holders.
Challenges H-1B Home Buyers and Homeowners Face
While there are plenty of reasons that you might want to make a permanent home in the US, you might be uncertain about whether you will always live in the US. On an H-1B, your relationship with your employer affects your visa status and that relationship is not guaranteed.
Getting fired, for instance, can put your visa in danger. Since the US economy is constantly changing, your company may experience financial difficulties and might have to lay you off. This could make it challenging for you to make your mortgage payments or even compromise your visa status. If your H-1B extension is canceled abruptly or if you are fired from your job, you can stay in the US for a mere 60 days. And this is not guaranteed - the United States Citizenship and Immigration Services (USCIS) may shorten this grace period or eliminate it entirely.
If you are hoping to stay in the US long term, there is the possibility that your company will be unwilling to sponsor your eventual Green Card or your application may be rejected. In this case, you may need to leave the country, and you’d need to figure out what to do with your home.
Related Article: Can I Invest In An Start A Company While On An H-1B Visa?
Related Article: Can I Volunteer While I Am On An H-1B Visa?
What are Your Options For Your Home And Mortgage If You Move Back To Your Home Country?
While your immigration status will have no effect on your ownership, you may encounter challenges if you move back to your home country. Here’s what you can do if you leave the US but still own your home and have a mortgage.
Option #1: Sell your home to recoup your investment
Selling your home may be the logical choice if you return to your home country.
If you are rushing to sell your home, you may not get the best price for your property. Most homes stay on the real estate market for 65 days and once you are under contract, closings typically take 45-60 days - that’s about 3-4 months end to end to sell your home.
If you sell the house, you may apply for the B1 (business activity) or B2 visa (pleasure or tourism) so that you can remain in the US to complete the transaction. If you are unable to be present, you may authorize someone to sell the property by giving him or her a power of attorney to execute the sale on your behalf.
You may also encounter a challenge if you haven’t owned your home for very long: being underwater. Underwater refers to a situation in which the remaining debt on the mortgage is greater than the fair market value of the property. In this case, even if you sell the property, you may still owe money to the bank in order to be free of the mortgage.
Being underwater happens when property decrease. If you mortgaged the home for $150K and your home is now valued at $130K, you are underwater by $20K.
Under certain circumstances, you can work with your lender and ask them to sell your home in a “short sale.” In a short sale, the lender will accept the proceeds from the sale of your home as full payment for the loan, even if it doesn’t cover the mortgage. It can take a long time for a bank to approve a short sale and if a short sale happens, your credit score could suffer. It may dip by as much as 150 points after the short sale. Some lenders may file a deficiency judgment to collect the difference. Unless you are in California, Washington, Nevada or any city where lenders are prohibited from seeking a deficiency judgment, you may still be liable to your lender after the sale.
Option #2: Rent out the property to earn rental income
Generating a rental income from your property even after you leave the US may help you recoup your investment.
Being an absentee landlord may also be challenging. You may face additional barriers in collecting rent, corresponding with tenants, and maintaining the property. You might decide to hire a property manager to manage your tenants and property.
A property management firm will typically charge between 8 to 12% of the property’s monthly rent. These fees can cut into your ability to make a profit or break even on your monthly payments.For instance, you might pay mortgage payments of $1,000 on the property and rent it for $1200. This gives you a $200 profit. If your management firm charges 8% based on the rental payment, you’ll have to pay $80 per month. This will reduce your profit from $200 to $120. In addition, you may have maintenance or utility costs or you may have to pay a broker fee to a realtor to help you find a tenant. Margins can sometimes be slimmer than expected in real estate!
Your US-source rental income will be taxed at the 30% flat rate or an applicable treaty rate since you are a non-resident alien. However, you can make the choice to treat the rental income as effectively connected to a trade or business in the US. This allows you to claim deductions and you will be taxed at ordinary income rates.
Option #3: Allow your child, family, or friend to live in the home
If you are leaving the US but your child or a family member is still in the country, you might opt to allow that person to live in your house. Depending on the circumstances, you might ask your family member or friend to pay you rent or pay the mortgage payments and property taxes on your behalf.
Non-Negotiable: Continue to pay the mortgage to avoid default
Even if you leave the US and move abroad, you should still pay your mortgage. Since your mortgage is secured by your home, your lender will foreclose the property if you default and will sell it to pay off your loan.
If the proceeds from the sale of your property is not enough to pay off your mortgage, your lender may pursue you for the deficiency unless the state laws prohibit them from collecting the difference. In the event that you are unable to pay the mortgage, rather than allow your lender to foreclose the property, it’s safer to issue a deed in lieu of foreclosure to pay off the entire loan. This way, you can avoid foreclosure proceedings and the lender can no longer go after you for the deficiency.
Aside from allowing lenders to go after you for deficiencies, a foreclosure also affects your credit score. Credit default will stay in your credit report for 7 years.
It is never a good idea to ignore your debts and leave them behind. It is challenging for US lenders to pursue you and force you to pay if you live abroad, but it will impact your credit and lenders may still be able to sue you, whether you are in the US or not. A judge may grant them the ability to seize any US-based bank accounts and if your wages are paid by a US company, those wages could be garnished. Instead of ignoring your debts, if you are unable to pay your mortgage, you should explore filing for bankruptcy.
Related Article: Beware The Exit Tax - Giving Up Your Green Card Can Be Costly
Beware of International Transfer Fees When Paying Your Mortgage
Even if you decide to leave the US, you will still owe money for the mortgage. While it may be possible to maintain your US bank account, you may have to make payments from abroad. These international transfers can incur hefty fees. Explore your options for the best way to remit money to your lender to avoid these fees.
Related Article: Remitting Money Across Borders? What You Need To Know
Delay Buying or Stay Within Budget
If you are on an H-1B and considering buying a house, be sure to reflect on your current visa status, your employment situation, and your long term goals. Many H-1B visa holders delay buying a home until they get a Green Card. If you do decide to buy, be sure to purchase a home that is no more than 250% of your annual income and make a contingency plan in case you need to leave the US.