There has been a lot of talk in the news recently about big changes being made to CMHCs eligibility rules for mortgage insurance.
Angela Bell, Mortgage Agent breaks down everything you need to know about your eligibility for mortgage insurance.
These changes will take effect on July 1, 2020. People are understandably worried about what this will mean for, not only first-time home buyers but also people affected by the pandemic. Many people have been forced to rely on things, such as credit cards or lines of credit, due to decreased earning as a result of the pandemic. Or they may have had to dip into their savings. There is talk of decreased debt allowances, high credit score requirements, and changes to accept down payments. What does it all really mean? Who is going to be affected? What can you do about it?
Let's take a look
The first thing to know is that these changes only affect people looking to buy a home and do so by obtaining a high ration mortgage. A high ratio mortgage is one where the borrower has less than 20% of the purchase price available for a down payment. When a borrower obtains a high ratio mortgage, the lender requires them to take whats called Mortgage Default Insurance. This is what is commonly referred to as CMHC insurance, and it protects the lender in the event that the borrower defaults on the loan. So, if you have 20% down or you are refinancing a home you already own, you are not affected by these changes.
There are 3 main changes being made by CMHC (Canadian Mortgage and Housing Corporation) to their insurance eligibility requirements.
- Less debt as a percentage of gross income. The existing rules allow borrowers to spend up to 39% of their gross income on housing and housing-related expenses (mortgage, property taxes, heating and half of the condo fees). This number is referred to as Gross Debt Service (GDS). They also allowed borrowers to allocate 44% of their gross income to total debt payments, including credit cards, car payments and other loans. CMHCs new rules will reduce these percentages to 35% and 42%. This means only 35% of gross income can go toward housing expenses. This decreases the total amount someone can borrow under the new rules with the same amount of income.
- New minimum credit score. Under the old rules, a credit score of 600 was enough to allow you to get a high ratio mortgage. Under the new rules, the minimum credit score has been raised to 680. This requires borrowers to have stronger established credit.
- Elimination of borrowed down payments. In order to make up the minimum down payments, borrowers were previously allowed to use unsecured personal loans, unsecured lines of credit, even credit cards, so long as the payments were factored into the debt utilization calculations and the ratios still worked. Now CMHC is requiring borrowers to come up with the down payment from their own resources. These sources include savings, sale of an existing property, a non-repayable financial gift from a relative, or government grants. This means borrowers have to access to money, either on their own or from family for the most part. This will most affect first time home buyers who do not have an existing property to sell.
These changes are expected to have the largest impact on first-time home buyers. Someone earning $60,000 with no other debt and 5% down will be able to afford 10.9% less home under the new CMHC rules. Historically roughly 18% of CMHCs high ratio mortgages had a GDS of over 35% and 5% had a credit score of less than 680. All is not lost though. The silver lining is that there are two other, less talked about, insurers in the space. Genworth Canada and Canada Guaranty also provide mortgage default insurance and will not be following suit. They will be maintaining their existing underwriting policies which they believe already prudently manage their risk exposure.
If you have any questions regarding the changes, or if you believe this may present a problem for you, speak to a mortgage agent. They will know which lenders work with which insurers and who can pick their insurers. They can help you put together your best course of action to move forward with buying your home.
From Angela Bell
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