CMHC tightening the underwriting policies for insured mortgages. What does that mean for you?
On June 4, 2020, CMHC announced that they were tightening the underwriting policies for insured mortgages. This means that if you have less than 20% down payment on the purchase of a new home, the rules will make it harder to qualify and you will qualify for less financing than before July 1, 2020.
The July 1, 2020 changes that CMHC have announced are:
- A minimum credit score of 680 will be required instead of the current 600, keep in mind that the credit score you get to see on Credit Karma is a Trans Union score and consumer scores are only based on 6 months of history whereas the score CMHC is referring to is a Bank Equifax score and is based on 6 years of history. If you have questions on how to build your credit score, please visit my blog called “Credit Scores – How Do you Score?”
- Will reduce the total gross debt servicing ratios (cost of owning that house compared to income) to 35% of annual income, compared to the current 39% percent, and total debt servicing (all debts including the new house to income) to 42% versus as much as 44% now. This means currently a household income of $50,000 with no other debts could currently qualify for a purchase price of around $220,500. With the new CMHC ratios that same household income of $50,000 with no other debts would be limited to a purchase price of about $191,700. That’s about a $30,000 difference. If you have other debts such as credit cards, loans, and lines of credit. Your purchase price would be even lower.
- Borrowed down payments will no longer be acceptable. This was a rarely used option that very few lenders or banks ever used mainly because adding the monthly payment for the down payment loan or line of credit caused the ratios to be too high for clients to qualify for the mortgage they desired. Gifted down payments are still allowed, as are 5% down payments from own resources.
Fortunately, CMHC is not the only insurer that Banks can use for insured mortgages. There are two other companies, called “Canada Guaranty” and “Genworth” that provide insurance for lenders on insured mortgages. The good news is that on June 8, 2020 both Genworth and Canada Guaranty have confirmed that they will not be changing their policies as CMHC has announced. There are many Banks and lenders that will continue to use the other insurers during this time of change in Canada.
If you are wondering about the process to get a preapproval, we can complete a full process via online contact. If you are looking for a list of documents that would be required for a full preapproval, please see my blog post “Documents”.
