Getting a Mortgage in Portugal

Yes, foreign residents can get a mortgage for buying a home in Portugal. No, it’s not as easy as the collective wisdom of the internet makes it sound.

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If you Google “getting a mortgage in Portugal,” you will get a dump of ads from consulting firms and listicles from blogs that are, in my not-so-humble opinion, pretty rosy descriptions of the process of getting a mortgage in Portugal as a foreigner.  Now, I don’t want to rain on anybody’s parade: you can get a mortgage in Portugal as a foreign resident.  But it’s not a cakewalk and there are important differences between mortgages from banks in Portugal and mortgages from US banks that many of these sources don’t discuss because they are not approaching the process from an international perspective.  I am here to try and rectify that situation based on my own personal experience of having purchased two homes in the United States and two in Portugal, with the goal of helping you to avoid some of the pitfalls I painfully discovered in the process.  And if you’re not an American but are from outside of the EU, this information should be equally helpful to you.
I will go into more detail below, but here’s the gist of this article:
Getting a mortgage from a Portuguese bank as a foreign resident is definitely possible, however, the process is more complicated in terms of documentation required and more expensive in terms of the financing banks will extend than many non-citizens realize.  This is especially true if your income and financial holdings are not in Portuguese territory or if they are in any way complicated or irregular.  Foreigners present unique challenges to banks in Portugal, and therefore bring elevated financial risks, which banks do not like.  As a consequence, some banks do not typically work with non-citizens, and the ones that do will usually provide smaller home loans than they would offer to Portuguese citizens.  If you can buy a property in cash, it will save you a lot of bureaucratic grief, and considering that Portuguese property values have risen or held constant in the last several years, it might be a good return on your money.  But if you can’t buy in cash, don’t worry, you can still get a mortgage here.  You just need a little fortitude. 
I’m not going to talk about specific documents you need – this is standard fare – or about the types of mortgages that exist – basically, variable rate vs. fixed rate, same as in the States – but I do provide an overview of the main differences between US and Portuguese banks when it comes to home lending, with things to keep in mind if you are a foreign resident in Portugal, especially if you’re from the United States.  I’m starting from the assumption that the reader has purchased a property before and knows the ins and outs of buying real estate, which are broadly similar in the United States and Europe.  However, if you’ve never purchased a property before, this guide should still be a useful introduction.
Here are the topics what we will be covering, with section links:
Note: This article is informational only.  I am not a legal or financial professional, just an experienced home buyer, so always seek guidance before you make any legal or financial decisions.  Also, everything I discuss below is based on my experience as someone who speaks Portuguese.  (Sidebar: as I’ve said before, if you are going to live here, you should try to learn Portuguese.  You can do it.  It’s not harder than any other language.) If you don’t speak Portuguese, find someone you trust who does speak Portuguese to help you out, and before you pay or sign absolutely anything, lawyer up. (Sidebar 2: if you speak Portuguese, you don’t have to pay a premium for an English-speaking lawyer.)

Where to Start: Calculating What You Can Afford

Only you know how much house you can afford.  If you’re completely unfamiliar with the Portuguese real estate market, start with my Portugal Real Estate Watch post to get a sense of housing prices in Portugal. 
But there’s a couple things you need to include in your budget calculations that may not be on your radar: 1) you might have to make a bigger down payment in Portugal than you would in the US because banks will finance a smaller portion of the total purchase price, especially if your fiscal residency (i.e., where your money is kept and your legal tax base) is not in Portugal; 2) closing costs are higher than in the US because of taxes; and 3) closing costs are not rolled into the mortgage so you need to pay them in cash at closing. 
  1. There are no 100% financing options in Portugal.  Almost all Portuguese citizens have to put at least 20% down and get a mortgage for the rest.  Banks *may* offer 90% financing (i.e., you only put down 10%) but they will probably want the appraisal value to come in substantially higher than the purchase price.  (More on this later.) Some banks will straight up only offer 50% financing to foreign residents, so be prepared for this.  Plan on seeing mortgage offers typically ranging from a high of 80% to a low of 50% of the purchase price – in other words, you would be putting down 20-50% in cash.
    • If you’re trying to figure out if you’ll be closer to 20% or 50%, keep this in mind.  From the perspective of Portuguese banks, the first issue in lending to foreign residents is credit history: you don’t have one in Portugal.  They may ask to see your US credit score, but that doesn’t hold as much weight as a credit history here.  The second issue is assets Portuguese banks can go after if you default on the loan: many foreign residents keep their financial capital outside of Portugal so there are fewer assets within the bank’s jurisdiction.  This is why they want to see a regular paycheck (or social security check or payments on rental properties you hold or some other income stream) going into your account every month, and will probably ask for an employment contract if you are employed.  So, if you have cash or investments in Portugal; if you’ve ever taken out a car or other loan before in Portugal; if you already own property in Portugal; or if you have a steady work/pension history, it will probably be easier for you to qualify for a larger mortgage.  If 100% of your money is outside of Portugal; if you’ve never taken a loan out in Portugal before and own no property here; if you are self-employed or are a freelancer with variable income, it will probably be more difficult.  Of course, anything is possible if you find the right bank/banker.  See the next section.
  2. In the United States, the general rule of thumb on closing costs (i.e., bank fees and taxes) is that these are about 1% of the property’s purchase value.  So, if you were buying a home for US $300,000, your closing costs would be around $3,000, depending upon the US bank and local tax rates.  In Portugal, however, closing costs are about 10% of the property’s purchase value, so for the same property, you would be looking at $30,000 in closing costs, most of which would be due to taxes. 
  3. Unlike the United States, closing costs are not rolled into your mortgage so you need to pay for these in cash at closing.  So, if you are putting 20% down on a $300,000 property and getting a mortgage for the rest, you should calculate on paying $60,000 in cash to the seller when you sign the purchase contract (i.e., the down payment), and then you need another $30,000 in cash at closing (i.e., closing costs) that you pay to the bank and the Portuguese government directly. 

Who to Talk To: Banks Vs. Brokers

In theory, the idea of a Portuguese mortgage broker is a good one.  Instead of you going one by one to a handful of banks and applying for mortgages multiple times, you give all your information to the broker and the broker farms this out to a bunch of banks for you to get quotes.
In practice, however, it may be more complicated than that – at least it was for me. The broker will start out requesting a slew of financial and tax documents from you regarding your income and assets, and will then send this information to 10 banks or so with requests for a mortgage quote.  That usually isn’t enough for the representatives of the banks who will be looking at your 70-page US tax return and not know how to input the information into their computer screen, which is designed for a substantially less complicated Portuguese tax return, so they’ll either come back requesting their own slew of documents or with questions and clarifications or say “no thanks, peace out.”  After a month of going back and forth with a (large, international) broker I once tried working with here, repeatedly answering the same questions from all the individual banks I had already discussed with the broker who was supposed to be streamlining the process, I stopped working with that company.  Then, I went directly to two different banks, got competing offers, and chose one.    
If you are already in Portugal, you probably already have a Portuguese bank account so you can start off by talking with a mortgage specialist at your bank.  They at least have some sense of your banking history and may be motivated to expand their business with you, while the other banks don’t have any history with you and have nothing to lose in telling you no.
You should also ask the people you know here – other expats, Portuguese friends and acquaintances, your buyer’s agent if you’ve lined one up – if they can recommend a lending specialist (or even a broker that’s better than the one I used, but who I won’t identify here for liability reasons) that you can contact.  Portuguese banking is still quite a “who you know” affair, and if you are a friend of a friend, a banker may take you more seriously than if you are just some rando who walks in off the street.
Ideally, you want to be able to compare at least two competing offers – and more is even better – but the differences will probably be fairly minor between them.  No bank is going to offer you a mortgage with a 5% interest rate when everyone else is offering 7%.  Where you might see advantages between one bank and the other is the value they expect from the property’s appraisal (i.e., one bank may want it to be higher than your purchase price or will only offer you a smaller loan), closing costs (i.e., they may shave off a little if you open up a bank account at that bank, but the bulk of your closing costs will be government taxes anyway, and they will be the same no matter who gives you a mortgage), or the terms of the mortgage (i.e., one bank may offer you a 30-year fixed rate but another bank only a 25-year fixed rate). 
Portuguese banks typically don’t lend to anyone past 70 or 72 years of age.

Life Insurance: Not on Your Life, But Your Mortgage’s Life

You may already have a life insurance policy on your life, which will pay your spouse or children or some other loved one a fixed amount when you die.  But you may be surprised to discover that you can also buy a life insurance policy that will pay off your mortgage to the bank if you die.  Well, “can” is not the right word.  The bank will make you.
It’s standard practice in Portugal, and common throughout Europe, that banks will require you to pay a monthly premium in life insurance to protect the bank by paying off the mortgage in the event that you die.  It doesn’t matter how large the mortgage is; you will still have to pay something.  You cannot decline the life insurance either or they will not give you the mortgage.
Depending upon your age, you may also need to do physical exams, just as in a life insurance policy on your life.  And they may raise your monthly premium if you have pre-existing conditions.  If the mortgage is large enough, the monthly premiums can be a couple hundred dollars or more, so pay attention to this during the mortgage quote stage.  You may end up paying more in life insurance on the mortgage than you pay on homeowners’ insurance on the house.

Assessing the Property’s Value: Banks 1, Market 0

After you are pre-approved for a mortgage, and are in the phase of your contracting process where the mortgage is being finalized, the bank will require an appraisal for the property’s value.  Regulations on property appraisals in Portugal got stricter after the global financial crisis of the late 2000s, so Portuguese banks have some say on who does the appraisal but not as much as in the halcyon pre-subprime days.
Independent property appraisers must register with and be approved by the Portuguese government.  Banks can chose among a pool of appraisers, but the specific person who will conduct your property’s appraisal is randomly assigned.  What does that mean?  Well, if you are trying to buy a 300,000 euro property with a 250,000 euro mortgage, your banker can’t call up the appraiser and say, “Hey buddy, this property is definitely worth at least 250k, amirite? Wink wink, nudge nudge.”
Now, you might think to yourself, so what?  Why would I pay 300,000 euros for a property that the bank says isn’t even worth 250,000?  Well, property appraisers are *really* conservative in their assessments of a home’s value compared to the market, especially in areas where property values may be overheated, like in Lisbon or Porto.  (I talk about this in my Portugal Real Estate Watch post.)  It’s not unheard of for you to find what you think is an unbeatable deal on a property, the cheapest thing you’ve found in months, and the bank turns around and tells you that the appraisal came in at less than what you’re paying for it.  What happens then?
Let’s take a hypothetical example.  Imagine you found an amazing deal on a fully refurbished two-bedroom apartment with parking in Lisbon for 100,000 euros.  (We’re imagining, people.) You want to put down 10% (10,000 euros) and get a mortgage for the rest (90,000 euros).  The bank tells you, “OK, we’ll give you this amount, but the appraised value must be at least 125,000 euros.”  You think to yourself, no problem, you could easily flip this place for 150,000 euros.  It’s a total steal.  Then, the appraisal comes in and it’s only 120,000 euros.  So, you have two options: the bank will loan you 85,000 euros instead of 90,000, which means you pay the difference in cash.  Or you pull out of mortgage and either pay for the house in cash or cancel the purchase contract with seller – that is, provided you’re still in the window of time you wisely built into said contract to cover a situation where the bank does not finance what you need it to. 
Is this scenario farfetched?  Well, something similar happened to me once here, so not that farfetched.
You need to pay close attention to the minimum appraised value the bank wants before they’ll give you the mortgage.  If it’s just your purchase price, hopefully you’re not overpaying, and the appraisal will come in at least at the value of your purchase price.  If the bank wants the appraised value to be above your purchase price, be prepared to possibly have to fork over more cash.

From Offer to Closing: The Tax Man Commeth

The exact process from purchase offer to closing will vary, but here’s the general breakdown:
Offer Phase: You make an offer to the seller in writing – an email is usually sufficient at this stage – and pay a small deposit (i.e., what we call earnest money in the US), around 2-3,000 euros, to take the property off the market until a formal contract can be drawn up.  This is usually held in escrow by the seller’s real estate agent and credited toward the final purchase price if the offer is accepted.  If your offer is not accepted and the sellers don’t counteroffer, your deposit should be returned to you immediately.  You may be able to tell the seller’s real estate agent to go pound sand and see if the seller will accept your offer without this deposit, but it’s called um sinal (a signal/sign) for a reason: because it’s an indicator of good faith and your ability to do your part in the purchase process.
Contract Phase: Next, a formal contract is drawn up and a closing date is agreed on.  If you are financing the purchase with a mortgage, the contract should include a clause giving your bank enough time to formally approve and process your mortgage and for the appraisal to take place.  My strong advice is that you consult with your banker and have a lawyer review the contract before you sign anything. For the sake of example, if the contract is signed on June 1st with a July 31st closing date – 60 days instead of 30 days is pretty standard here – you would want a clause in the contact saying something to the effect of the contract being null and void, and all monies paid returned to the purchaser, if the purchaser’s financial institution does not agree to finance the sale in the amount requested by the purchaser by X date. Again, your bank and your lawyer will be able to help you with this.
Note: unlike in the United States, a contract contingent on a property engineering inspection that you pay for is not common practice in Portugal, but you can request one.  Just make sure you find a good inspector.  I had an engineer once that was so incompetent, I never even got the written report.
The agreed-upon down payment is due to the seller on the day the contract is signed, and the contract is usually signed at the seller’s real estate agent’s office.  (You may possibly be able to do it electronically or sign a power of attorney to have your lawyer sign for you.) The down payment will be paid via electronic transfer so make sure you know how you are going to do this.  Portuguese banks often have relatively low limits on the amount of money you can transfer in a day, so check with your bank ahead of time to make sure you can make the required transfer in case they need to lift that hold for a day.
If you are getting a mortgage, the bank will schedule the property appraisal at this point.
Sit Around and Wait Phase: Sit around.  Wait.
Closing Day: You, your real estate agent (if you have one), the seller, the seller’s real estate agent, and a representative from your bank will meet at a notary office selected by your bank.  (Notaries in Portugal are lawyers and have broader rights and responsibilities than notaries in the United States.)  The contract, including the terms of your bank mortgage that impact the sale, is read aloud – in part, for you to know what you’re signing; in part, for them to check for orthographic errors – but if you don’t speak Portuguese, they will be required to read a translated version.  The closing costs and taxes will be paid via electronic transfer as well, so same as above applies: talk to your bank ahead of time.
After that, they hand you the keys and the house is yours. Well, 20% of it anyway.
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