Thinking about buying a new home purchase in a new home community? The new CHMC Mortgage Changes might make that purchase harder! However, there are still ways to buy despite these rule changes. Read on!
Keeping up with all the changes in the Canadian mortgage market is tough! Every year, there are new rule changes that make life more challenging for buyers. If the pandemic hasn’t made life difficult enough, you now have to contend with CMHC rule changes that make borrowing much more difficult for some.
First, Do You Even Need Mortgage Insurance To Buy Real Estate?
While many people were upset about the changes, it is worth taking a step back to see if these rules apply to you. From a lender point of view, there are two kinds of mortgages: insured and uninsured. An uninsured mortgage means you don’t have to worry about CMHC rules. If your down payment is over 20% of the purchase price, then you can probably ignore CMHC requirements. In contrast, by leveraging CMHC insurance, you can buy a $500,000 home for just $25,000 (i.e., a 5% down payment).
Since CMHC insures billions of dollars worth of mortgages, it is worth taking a closer look at their requirements.
The Key Mortgage Insurance Changes
1) Debt as a percentage of income. There are two aspects to this rule.
- First, buyers will be limited to spending 35% of their gross income on housing vs. 39% in the past.
Assuming you have a $100,000 annual income, this rule change means you used to be permitted to spend up to $39,000 per year ($3,250 per month) of gross income on housing. Today, that amount is limited to $35,000 per year ($2,916.67 per year).
If your income has declined, then this rule change will have an even more significant impact on your ability to borrow.
- Second, buyers will only be able to borrow up to 42% of their income, including all other loans. That means if you have a significant amount of other loans like credit card debt, then your ability to borrow to buy a home may be negatively impacted. In the past, borrowers were able to borrow up to 44% of their gross income.
If you have significant non-mortgage debts, lenders and CMHC are concerned about that fact. You might tell them that you would always put your mortgage payment first. However, lenders do not want to get into conversations about “which debt to pay.” They would prefer to deal with borrowers who are capable of paying all of their bills.
2) The minimum credit score required for CMHC has gone up
To quality for CMHC mortgage insurance, a 600 credit score used to be good enough in the past. In July 2020, the new rules now require a 680 credit score.
If you have had a history of credit problems, especially not making payments on time, your credit score will reflect that reality. There are a few steps you can take to improve you score which we will cover later gradually.
3) Ban on borrowed down payments.
In the past, some borrowers used creative financing strategies so that they effectively had no real down payment. They might borrow $10,000 or $20,000 from other lenders and label those funds as a down payment. These methods obscured the nature of the borrower’s financial position. Therefore, it is no surprise that CMHC is formally discouraging the practice.
Remember, You Have Alternatives to the CMHC
While CMHC might be the largest mortgage insurance organization in Canada, they are not the only player. Genworth and Canada Guaranty also offer mortgage insurance. As of July 2020, these companies have publicly stated that they are not following CMHC’s lead.
According to CTV News, “Genworth MI Canada Inc. says it’s holding steady on its credit score qualifications, despite a move by one of its main competitors to toughen mortgage lending standards.”
The story is similar at CMHC’s other major competitor, Canada Guaranty. According to the company, “Canada Guaranty confirms that no changes to underwriting policy are contemplated as a result of recent industry announcements.”
Four Ways To Improve Your Mortgage Options
While the CMHC lending tightening has prevented some borrowers from accessing credit today, the future is different. First, CMHC may change its rules under pressure from the public. Second, the two other players in the industry may change their position in the future.
1) Increase your income
If you increase your income by $5,000 or $10,000, that will unlock more borrowing power. That’s added motivation to advance in your career or invest your spare time into a part-time business.
Self-employed individuals and business owners may want to revisit their financial arrangements as well. For example, you may have planned to increase your business expenses to lay a foundation for future growth. That decision may mean less business revenue to pay an income to you. You may want to revisit those plans and decide to reduce business spending and increase your personal income so that you can achieve your real estate goals.
2) Increase your down payment in percentage terms
There are two ways to increase your down payment percentage by buying a property at a lower price. A $100,000 down payment would be 20% on a $500,000 purchase, which means you would no longer need mortgage insurance. In contrast, the same $100,000 down payment on a $600,000 purchase would require mortgage insurance, and you would have to face the demands of CMHC or another mortgage insurance provider.
3) Increase your down payment in dollar terms
For most individuals, the RSP Home Buyers Plan is one of the easiest ways to increase your down payment. As of 2019, you are now able to borrow up to $35,000!
3) Pay down non-mortgage debt
By reducing your debts, you will improve your debt ratios, and that will open new doors. If you have been making minimum payments in the past, consider increasing those payments. In a few months, you might have a much better credit picture.
4) Verify your credit score and report is accurate
Occasionally, errors on your credit file mean that your credit score is much worse than it should be. For example, you might have fully paid off a debt five years ago, and your credit report incorrectly states that it is still open. While credit report errors are relatively rare, correctly such a mistake can significantly improve your credit score and ability to buy a property. Therefore, it is worth taking an hour or two to review your credit reports for accuracy.
Your Next Step
Review your real estate buying plans. If you are considering purchasing a home in one of our MLC Communities, visit a showhome! The sales staff can help you discover whether the CMHC changes will impact your real estate plans.