How best to buy two places?

November 1, 2009 1:41 AM

I'd like to buy a place in America. I'd also like to buy a place in Hungary. I've got enough for a 20% down payment on both. I've also been told that I would qualify for a loan for a place (in America) equal to what the cost of the *two* places would, in actuality, be. I would have no problem affording both - I live on about 25% of my net income and have not a penny of debt, even if the mortgages would be equal to the upper end of what I might qualify for - so I'm not worried about that. But does the fact that I'd be buying *two* places, in two different countries, affect the situation?

To put it another way:

Obviously, I'd have two separate mortgages. If I bought one place (for much less than what I would have qualified for), would I have a hard time qualifying for the second, even if the amount of that second loan were smaller than the difference between the amount I originally qualified for and the amount of the mortgage of the first place?

Anyone have any experience with such a thing?

posted by Dee Xtrovert to home & garden (2 comments total)

Simply put, you will need to be able to qualify under the business rules in place in both countries. In the United States, you will need good credit, as defined by your credit report from the three reporting bureaus, and proof of continuing income that's able to pay the mortgage. There are no foreign ownership restrictions, so if you are not a citizen of the US, this is not an issue. In Hungary, you generally need 30-50% down and must have the legal right to purchase property in the country. As a rule, most homes in Hungary qualify, but larger estates may require additional clearances, or, if you are a foreigner, may be barred. This is in addition to bank references and proof of income.

The United States mortgage process usually only concerns itself with property in the United States, but you may be asked about the Hungarian mortgage payment--and it will be included in your debt-to-income ratio--if you are using income from that country.
posted by fireoyster at 2:25 AM on November 1

Ok, I've been in a similar situation, but with a few twists.

I'm American, currently live in London where I own a flat but I have simultaneously owned property in other EU nations.

Your first concern should be currency exposure; unless you're generating income in Forints, you're effectively taking a view i.e., speculating on exchange rates. Should either the US Dollar markedly depreciate or the Forint appreciate, your mortgage payment, previously manageable, may become burdensome.

While there are, of course, capital market based mechanisms to mitigate or otherwise eliminate this risk (i.e., derivatives), there are two complications: first, unless you're already familiar with these instruments in general, and how they are used in foreign exchange specifically, they simply are not for you. Second, transactions costs will have to be added in. These may be large as a percentage of the amount of money you're proposing to borrow, so large that it would be more cost effective to transact without the benefit of such hedges.

In my own situation I'm very comfortable with derivatives (I work in banking), but I effectively dodged the problem by finding a lender willing to accept the risk. In other words, I found a Euro mortgage that I could pay for in Pound Sterling (locally, I generate income in Sterling). Many private banks offer such products although they are costlier than an Equivalent Euro mortgage simply because the risk has been shifted to the lender.

I've been living abroad since 1997 and know lots of expats; many of my acquaintances find it preferable to simply purchase property in a foreign country, rather than try to find an acceptable (i.e., cheap) mortgage.

Second, if you're assuming you're not going to live in the Hungarian property rather rent it out your tax situation will get far more complicated. You'll be generating income in Hungary that will, of course, be taxable in America - we're subjected to global income taxes.

And it gets even murkier / complex should you decide to sell your second property. The IRS fixes exchange rates once per year, and an adverse move in the US / Forint rate could leave you with a large tax obligation even though you might have incurred a capital loss on the actual sale. It actually happened to a buddy of mine (that's the only reason I know about it), and needless to say, it was a very unwelcome surprise so you've got to be very careful about timing in these situations.

That leads to the third problem; taxes. Since you're generating income in Hungary, from an Hungarian property you'll more than likely have to file tax returns and pay taxes there. You won't be double taxed (i.e., pay both US and Hungarian taxes on one Forint of income), but you'll have to file two sets of returns which, of course, may require professional assistance.

Fourth, you're going to need (perhaps already have?) a bank account in Hungary. Because of problems with tax havens such accounts are subject to increased scrutiny by the American authorities. These scrutiny results in increased paperwork, to the point where many foreign banks are now refusing to open accounts with Americans.

If you're a Hungarian national this may not present a problem, however it is something to keep in mind as we're seeing banks in even relatively US friendly countries (e.g., Switzerland, the UK) now refusing new accounts and in some cases closing existing accounts held by Americans (this is a big problem for many of us who choose to live abroad). I don't expect this situation to get much better over the years.

Fifth, and on a more positive note, the range of deductions available to you with respect to your foreign property may be larger, thats certainly the case in my situation, but you'll need to find someone who knows but US and Hungarian tax law to determine this. In my own specific case I can deduct any costs necessary to maintain a residence abroad for purposes of employment, meaning in actual practice the "usual" deductions associated with the ownership of a home (e.g., interest on the mortgage), but also extras such as maintenance, selected improvements, and even some utilities (e.g., electricity, phone but not water). I can't stress enough you really need a professional's input here.

These are just a few issues to keep in mind. None are really reasons for not owning property abroad if you're an American, rather some of stuff to be aware of. After all, some research and professional advise now may help you avoid an unpleasant surprise (i.e., a big bill) later.

Hope this helps!


PS - congrats on your frugality. I'm a member of the "save 80% of my net income" club as well.

posted by Mutant at 4:10 AM on November 1 [9 favorites has favorites]