Since the CMHC news on July 1 2020, has your mortgage affordability dropped 10-15%?
The Canadian Mortgage and Housing Corporation (CMHC) stressed a lot of home buyers out in June 2020 as they announced some drastic changes to mortgage eligibility for people with under 20% down payments. These changes might reduce your buying power by 10-15% - but does it apply to you?
What many home buyers didn’t realize was that there are two other mortgage insurers that lenders might send your deal to if you do not fit the following new restrictions put forward by CMHC - these two insurers were quick to respond to the CMHC news and said they would not change their policies as well. So are you safe? Kind of. The CMHC was known to be very generous with credit score and self-employed programs so many files that did not fit the other insurer policies were usually sent to CMHC. You now have to push your mortgage broker to ask lenders if your special case can qualify under the other insurers if you do not fit CMHC’s new restrictions below.
Now some background on the July 1, 2020 changes…
According to an early June press release by the nation’s biggest mortgage insurer, The Canadian Mortgage and Housing Corporation (CMHC), dropped the hammer and announced that strict changes that will make home buying significantly more difficult.
What the changes are
The following changes apply for new applications sent to CMHC:
Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42 (it is currently at 39/44) - you must minimize debt and increase income by 10-15% to have their new ratio equal the one from today.
Example: If you make $100,000 in income and you buy a single-family home using 39/44 you would normally qualify for a ~$490,000 mortgage with 5% down. At the new 35/42, you now only qualify for ~$435K mortgage with 5% down.
Establish a minimum credit score of 680 for at least one borrower - this shot up from 600 that was permisable before July 1.
Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes. In other words, unsecured lines of credit or credit cards will not be allowed.
They also suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing - pulling out equity from your home will be more scrutinized
Why they did this
Because of COVID-19, CMHC foresees a 9% to 18% decrease in house prices over the next 12 months. In order to protect future home buyers and reduce risk, CMHC is changing its underwriting policies for insured mortgages.
What this means for you
Don’t panic! This news might not affect you: Genworth and Canada Guaranty did not respond with similar restrictions so this news may not apply to you. Make sure to ask your mortgage broker to ask their lenders if they use Genworth and Canada Guaranty because if they will send your deal to the other insurers, no need to panic!
Manage debt better and save more for your down payment: It’s clear that you now need to better manage your debt and maximize income. The former is usually more in your control than the latter so make sure you’re reviewing expenses monthly and most importantly, saving more for a down payment as more than ever, putting more than 20% down is crucial.
Better manage your credit score: The minimum requirement of credit score shot up almost 15% so you cannot afford to complicate what is already an even more complicated process. A good credit score is table-stakes and you need to be on top of it early. See this article on how to build or repair your credit score.
Act now and get pre-approved: If you have been waiting on the perfect home or still want to see house prices drop, you now need to get pre-approved and know where you stand more than ever. This assumes your debt to income ratios and credit scores may be below the new threshold.
THE BOTTOM LINE
Speak to your mortgage broker about how this applies to you. Again, the two other mortgage insurers did not follow CMHC’s changes so you might still be able to qualify on their rules. However, to be safe, you should budget to fit CMHC’s guidelines so all best-rate lenders will be allowed to insure your mortgage.
Get pre-approved and see what this means for you by contacting me at paul(at)levelupmortgages.com
*Note that if you put more than 20% down on an insurable mortgage, the lender generally pays for the insurance (instead of you) so they also might be limited by the above rules with CMHC. If this is the case, the above rules might still restrict you so ask your mortgage broker about this even if you are putting down a larger down payment.