Your Essential Guide: Comparing Mortgages in the USA vs Portugal

More Americans than ever before are relocating to Portugal – more than 14,000 in total – or investing in the country’s thriving property market. But, if you are also considering discovering your ideal property in Portugal – and plan to take out a loan to help finance the buy – one of the key questions that you’ll want answered is about the mortgage process and how this process differs from in the USA.

The first thing you should know is that there are key differences between the two countries and, in this comparison guide we’ll walk you through how banks assess your eligibility, how interest rates differ, the closing process, and more, so you’re fully prepared to jump on the property ladder in Portugal.

Mortgage Eligibility

While the mortgage process is not too tricky in Portugal, there are certain points that differ considerably from securing financing in the USA – and one of these is related to mortgage eligibility. We’ll provide a brief overview of the general eligibility requirements to get a mortgage in Portugal, before outlining the key differences between Portugal and the USA.

Mortgage eligibility requirements in Portugal

Breaking it down very simply, to get a mortgage in Portugal, the general eligibility requirements are:

• Have a solid credit history to have your loan approved
• Have proof of a solid income, which you will need to show through pay slips or tax returns from your home country, to show you can manage your monthly mortgage payment

Debt-to-Income ratio

At the beginning of the lending process, Portuguese mortgage lenders conduct a debt-to income (DTI) ratio assessment. This entails taking out your monthly debt payments, such as loans and other mortgages and dividing it by your gross monthly income. In Portugal, the ideal debt-to-income ratio is about 35 to 40 percent.

In the USA, as a general guideline, the highest DTI ratio to still get accepted for a mortgage is 43 percent, although the ideal DTI is around 36 percent or lower.

An important note to make is that, in the US, they consider your gross income. It doesn’t matter what comes out of this, for example, your health insurance, retirement plan or other dedications, you will still qualify if your gross income meets the requirements set out.

While this is the same in Portugal, and they do consider your gross earnings, they may also check your net income as shown on pay slips, tax returns, and confirmations from accountants or employers.

Age limits

A key difference between eligibility for a mortgage is that, in the USA, there is no age limit to taking out a loan under the Fair Lending Act. However, in Portugal, while there is no statutory maximum for obtaining a mortgage, banks usually set their own limits, with age limit usually of around 70-80 years old. Additionally, if you are over 60 years old and are looking into getting life insurance in Portugal (it’s a standard loan requirement), although possible, it can be very difficult. On the other age of the spectrum, for both countries, you need to be 18 to take out a mortgage. Also, if you have health issues, it can be more difficult to get a mortgage, of if you have certain diseases.

Mortgage Approval

When it comes to getting your mortgage approved, there is a key cultural difference between the two countries. In Portugal, the lending process can seem more personalized and less automatic, whereas in the USA, whether you are approved or not is generally determined through computerized systems.

For example, in the US, documents – such as your credit score, income, assets, and other financials – are inputted through an automated computer system. Should all the data be inputted correctly and you meet the criteria, your mortgage application will then be accepted.

In Portugal, the process is slightly different. You – through your mortgage broker – will have your documents shown through different banks so that you get the best deal possible. It can be that one bank will accept your application, while another may not. It can even be the case that presenting your case in a different way to the same bank can make the difference between whether you are accepted or not. They may look at your relationship with the bank, your job stability and job position, and how you present yourself in the application. Each can have a bearing on the success of your application.

This is where having a good mortgage broker by your side is essential as they can present your case in a way that will get approved, given their experience in the market.

The Home Buying and Closing Process

The home buying and closing process can be quite different between Portugal and the USA. Below, we outline the key points of difference during the buying process and the closing process in Portugal, compared with the USA.

Portugal’s fragmented property market

In Portugal, the real estate market is fragmented and there is not one place to discover all the properties on the market – this is very different to the USA, where you have a public database of all property listings. To ensure you have a complete overview of the market, make sure to seek the assistance of a realtor in Portugal, or preferably, a buyer’s agent, who can provide you with full market access – to make sure you are not missing out on any terrific properties that may otherwise be unavailable to you.

Promissory Contract in Portugal

In Portugal, a key step in the buying process – once you’ve settled on a property – is to sign a Promissory Contract with the seller. This is a legally binding agreement that outlines the terms and conditions of the property sale and acts as a preliminary or pre-contractual agreement before the Escritura (Final Deed) is signed. We highly recommend that this is signed in front of a Notary.

For the promissory Contract, you will generally have to pay around 10 percent of the purchase price directly to the seller. If you, the buyer, back out of the purchase, you will lose this deposit, while if the seller fails to complete the deal, they will owe you double.

Stages of approval and differences in the buying process

We’ve already provided you with an in-depth overview of the approval stages in Portugal to get a mortgage, but below we set this out clearly for the entire buying process.

In Portugal

In Portugal, you’ll face three stages of approval when it comes to securing a mortgage and buying property.

1. Financial approval: Checking your income, credit history, and debt-to-income ratio to confirm your ability to manage your monthly mortgage payments. 
2. Technical approval: Conduct an appraisal to make sure the property’s condition and market value match the loan amount. 
3. Final confirmation: Title review and assessing the legal requirements of the property, checking for liens or other legal issues before closing the deal. This is why it is important to have an experienced real estate lawyer by your side.

In the USA

In the USA, the process is usually as follows.

• Pre-qualification: An initial green light from the lender showing how much you can borrow
• Earnest money: To get a loan in the USA, you pay what is referred to as “earnest money” to a settlement agent or title company that is handling the transaction (or sometimes to the real estate office). Usually, this is a relatively low amount – around 1 to 3 percent of the home’s purchase price. 
• Inspection and appraisal: Most buyers in America get a home inspection, and sellers expect buyers to commit to a home inspection of their property. Appraisals are sometimes waived if you have a large down payment and good credit. 
• Title work: A title company will check for liens and issues, with title insurance protecting the buyer from hidden claims.
• Closing: In the USA, it is common to sign many more documents than in Portugal, while in Portugal is more common to sign far fewer. Also, in Portugal, one of the required documents is the habitation document, while in the USA, you don’t have this document.

Is the mortgage and buying process simpler in Portugal or the USA?

We wouldn’t say that the process is simpler in one country or the other, it is more about what you are used to. For an American unfamiliar with the process in Portugal, the steps in the USA may seem to be more straightforward. 

As a result, seeking expert assistance throughout the process is essential, particularly if you don’t speak Portuguese or are unfamiliar with the main differences between the two approaches. 

In Portugal, generally, fewer signatures are needed at closing and there is more reliance on personal relations, which can be seen to show that the process in Portugal is a bit simpler. The USA has a highly standardized approach, where you will be required to sign more paperwork and will need to ensure your credit and finances meet strict automated guidelines. 

Working with a trusted real estate lawyer

While it is not a requirement, it is essential to work with an experienced real estate lawyer in Portugal when buying property. Portugal does not have a system like in US, where you have a title insurance policy that protects the amount you bought for the home. In Portugal, it is vital to verify the property’s legality and protect your interests – and for this, you’ll need an attorney on board.

There are many instances where a property buyer has bought a property in Portugal only to find out later that there are problems with the property, such as with the property being illegal, having outstanding taxes, and so on. Working with a property lawyer ensures that you are protected legally and will not run into legal problems further down the line.

Differences in Property Taxes

When it comes to property taxes in Portugal, expect to pay greater upfront costs than in the USA, regrading property taxes required at the time of purchase. Upfront taxes include Property Transfer Tax (IMT), which ranges from 0-10 percent of the property price, depending on the property price, location, type, and intended use of the property, but that usually falls at around 7-8 percent. The 10 fixed rate is for cases where the buyer has connections to territories that benefit from favorable taxation schemes, known as blacklisted jurisdictions.

You will also need to factor in Stamp Duty, which is 0.8 percent, alongside Notary fees of €500 to €1,000 and land registration fees (around €200 to €250). Alongside, this factor in costs for your attorney and real estate agent. In contrast, closing costs in the USA usually land between 2 to 3 percent of the purchase price.

However, ongoing taxes that you’ll have to pay on an annual basis – Municipal Property Tax (IMI) are significantly lower in Portugal than in the USA. For example, a property worth €1 million would set you back just €2,000 a year, but in the USA, this could be as high as 5 percent. Regarding affordably when it comes to keeping a property, it is much more affordable in Portugal.

Different Insurance Options Between Portugal and the USA

When financing a home in Portugal, lenders will face different requirements compared to in the USA. It’s important to know the key distinctions if you are seeking to get a mortgage in Portugal.

Both countries have their own ways of ensuring the lender is protected, but the specific coverage—life insurance in Portugal versus mortgage insurance in the US—reflects different lending practices and requirements.

Life Insurance in Portugal

In Portugal, if you are borrowing around 80 percent of the property’s value, banks usually make it compulsory to take out life insurance. The bank is named as the beneficiary, meaning that in the event of the borrower’s death, the insurance pays off the remaining mortgage balance. If you borrow around 70 percent, then you may be able to get a life insurance exemption. You will, however, need to pay property insurance.

Mortgage insurance in the USA

In the USA, if you put down less than 20 percent, you’ll generally need to get private mortgage insurance – which is not available in Portugal. Private mortgage insurance covers the lender if you default on the loan, but it does not protect you or your heirs in the event of death.

The good thing about mortgage insurance is that is very affordable. For example, if you borrow $720,000 with a good credit score, you may just pay around $108 a month. Once you build up about 22 percent equity on your home, the private mortgage insurance payments are no longer required.

Summing Up: Comparing Mortgages in Portugal VS USA

Why Act Now: The Strength of the US Dollar Presents a Golden Opportunity for US Buyers

The US dollar has soured to its highest level in decades in recent months and is expected to remain strong well into 2025. This presents an attractive opportunity for US buyers considering buying property in Portugal as, simply put, you’ll get more euros for your dollars. Similarly, British buyers will also find the same opportunity as the British pound remains the fifth strongest currency in the world.

With an array of property types, from modern apartments to luxury villas that line the coast and an array of spectacular locations to choose from– from the golden beaches of the Algarve to the historic allure of the capital, Lisbon – buyer’s will be spoilt when deciding which part of the country to choose.

Goldcrest: How We Can Help You

So, you’re considering snapping up your dream home in Portugal? 

Goldcrest is a buyer’s agent that is based in Lisbon, Porto, and the Algarve. We provide expert, impartial advice on real estate investments and how to buy property in Portugal. From scouting out your dream property through to property acquisition, we have you covered throughout the process. We can also help you navigate through the mortgage process to ensure you have clarity on financing your ideal property. 

Don’t hesitate to get in touch. Our team of skilled experts is available to solve all your real estate doubts, offering insightful expertise and strategic advice.   

Why choose Goldcrest?

• Local knowledge: With offices located across Portugal, our presence nationwide allows us to assist you personally across the country.  
• Independent service: As an independent buying agent, we do not represent any development or project. Our service is entirely tailored toward each individual client, providing you with everything you need to secure the perfect property at the best possible price. As an impartial advisor on the market, we work solely on behalf of our client and provide a service tailored to your needs and requirements.   
• Streamlined process: Our real estate agents speak English and Portuguese, and our service is completely focused on providing you with a hassle-free buying experience, saving you time.   
• Experienced team: Our expert real estate team has a vast local knowledge of the Portuguese property market. We have cutting-edge technology and metasearch tools at your disposal to provide full market coverage, ensuring the best investment choices and negotiated prices.  
• Network of partners: Lawyers, property management services, builders, architects, designers, and landscape gardeners, again saving you time and hassle by providing you with trusted experts in their field of work.