Planning a budget to purchase a home as an immigrant in the USA

Buying a house in the United States seem like daunting task for anyone going through the process. As an immigrant you also must consider potential legal work, visa restrictions, lenders (if you are getting a mortgage), and numerous other processes to purchase your own home. 

But at the end of the day, buying your own house can offer financial security for your and your family’s future! Before you set out on your homebuying journey, it is crucial to analyze and plan a budget The first rule of thumb is, ‘Do not buy more house than you can afford’. 

You might get approved for a higher mortgage amount but that does not mean, you should take all of it. ‘Affordability’ differs from buyer to buyer. First-time homebuyers often overlook the added costs of owning a house, other than their monthly mortgage payments. These costs include property taxes, insurance payments, and repair and maintenance expenses. 

This step-by-step guide to walks you through planning a budget to purchase a house as an immigrant in the United States.

Step 1: Determine your Payment Option

For homebuying, you have two options: to make a cash purchase or mortgage (loan) your house. A cash purchase may be the only option for some individuals who cannot secure a home loan because of an extremely low credit score, visa restrictions or other circumstances. 

When considering a home loan, the best way to calculate the right loan amount is using the 28% rule. The 28% rule suggests that your monthly mortgage payment shouldn’t be more than 28% of your gross monthly income. While this is general rule of thumb, it is important to factor all expenses for you and your family on monthly basis. The biggest mistake a first-time home buyer makes is not considering additional expenses with your home like taxes, insurance, or general repairs.

For financing a home loan, you have two options:

Conventional Loans:

Private sector mortgage lenders, local banks and credit unions offer conventional loans that are usually considered better than FHA loans. Conventional loans have a lower mortgage rate and low PMI costs. However, to qualify for an FHA loan, you must have established a good credit score and hold a stable income. Generally, the lenders prefer a 20% down payment but in some cases, they could require as low as 3%. But, if the down payment is less than 20%, your mortgage insurance premiums (PMI) will rise around 0.58% to 1.86% of your loan amount, adding additional expense over the life of your mortgage. 

FHA Loans: 

The Federal Housing Administration (FHA) is a government-backed mortgage lender that provides home loans, usually to first-time buyers with lower credit scores ranging from 500 to 620. The FHA loans are usually a second option for those who cannot qualify for conventional loans because of a low credit score or lower down payments. The FHA has a 31% rule which means they are looking for around 31% of your gross monthly salary as compared to non-government lenders that require up to 28%. 

As an immigrant you may think that FHA loans are only for permanent residents, but actually non-permanent residents can also qualify if the home will be your primary residence. 

Step 2: Considerations to Qualify for Mortgage

Credit Score:

Before choosing a lender, it is important to take into account your credit score. Even if you qualify for the loan, your credit score impacts the interest rate you will receive. Your credit score depends on numerous factors such as payment history, your total level of debt, types of credit, credit amount owed and the length of credit history that depends on how long you have been residing in the United States. 

Generally, to qualify for the loan, you need a credit score of at least 620. Although some lenders would be willing to approve for a lower credit score, they will probably charge a higher interest rate so you’ll end up paying much more in the long run. 

If you have newly moved to the United States or have not established any credit, you can learn more with this guide on how to start.

Finding a Mortgage Lender:

Choosing the lending company, you work with is an important part of this process because you’ll not only be bound to pay them but interact with them for years. Among the top mortgage lenders that offer the best interest rates are Quicken Loans, Bank of America, Chase Bank, MCK Lending Group and several others. 

Start your research well before you plan to take out a mortgage. The traditional first step would be to look and see if any lenders are advertising special rates or maybe programs well suited for immigrants.

It is important to judge lenders not only based on the interest rates that they offer but also on how they interact with their customers. Read online reviews posted by their clients to gain an understanding of how they behave with borrowers in pleasant and not-so-pleasant situations. 

If you have decided to mortgage your house, as an immigrant, who is not fluent in English, you can choose to work with a lender that has agents who speak your native language. This can also help you avoid misunderstandings and complications that result from communication barriers. 

Apply for Pre-Approval:

Once you have selected one or two lenders, you have to get a loan approved to find out the maximum loan amount and interest rate they are extending to you. 

It is important to note that pre-approval is different from pre-qualification which gives you a rough idea of how much mortgage loan you could potentially qualify for. The pre-approval process involves a detailed review of the borrower’s credit report and is followed by a solid offer of credit.  

To apply for the home loan, you will need the following items:

1. Social Security Number or ITIN number (for certain nonresident and resident aliens)
2. Government-issued ID card or a resident alien card, or a driver’s license 
3. Your signature
4. Proof of income for the last 2 years including overseas income or foreign currency converted to USD. (W2 and 1099 form)
5. Paystubs for the last 30 days or other proof of current employment 
6. Federal tax returns for the last 2 years
7. Two most recent bank statements
8. Two most recent investment account statements (if you have any)

Step 3: Homeowning Expenses Beyond the Mortgage

Other than your mortgage payments, it important to consider other expenses that come along with home ownership:

• Property Taxes: Your property tax rate depends on your state, city and county. The national average property tax rate is 1.1% but some states can have much lower or higher tax rates. For instance, Alabama has 0.4%, which is the lowest while New Jersey has 2.2%, which is the highest in the country. 
• HOA or Condo Fees: If you own a condo or a house in a community that has a homeowner’s association, you’ll also have to pay additional HOA charges. These can be either monthly or annually. Typically an HOA fee will be noted on the sale listing, but it is important to ask when looking for your new home.
• Homeowners Insurance: With some mortgage lenders you won’t be able to avoid homeowner’s insurance. If you buy a house in a disaster-prone locality, your insurance premiums will also be above the average costs. 
• Routine Maintenance: Periodic home maintenance such as landscape and lawncare or roof and HVAC replacement every 15-20 years can also strain your finances.

Bottom Line

First-time homebuyers often end up buying ‘more house’ than they can afford while chasing their American dream. This can put an enormous strain on their finances for years to come and in some instances can even lead to foreclosure.  

Even if you get approved for a higher loan amount, it does not mean you should utilize the entire amount you are approved for. You should always budget in advance and buy only what you can afford without sacrificing your financial freedom.