Does New CMHC Rules Makes Mortgage Application Tougher?

Quick Summery

Getting a mortgage is tough enough for many home buyers, they go through a lot to take out an insured mortgage. However, on June 4, 2020, the Canadian Mortgage and Housing Corporation (CMHC) has announced changes in eligibility for mortgage insurance in the latest response to COVID 19. This will make mortgage application tougher for home buyers during this pandemic situation.

New Rules of CMHC

The Canadian Mortgage and Housing Corporation (CMHC) has announced new mortgage rules that took effect on July 1, 2020. In response to this pandemic, CMHC comes up to tighten the requirements that intent on discouraging high-risk borrowers from taking a mortgage they can’t afford.

High-risk borrowers are home buyers with a less than 20% down payment on a mortgage. The CMHC will now require a higher credit score to approve a mortgage and will lower the threshold on how much debt applicants can take compared to their income.

Thus, we made a listing of main changes to CMHC rules to help you better understand. This following contains the list of rules.

New Minimum Credit Score

To qualify for an insured mortgage, the borrower must have at least a 680, which is higher than the previous minimum score of 620. Getting a mortgage loan with poor credit will not be easy.

However, you may consider finding a credit fixing agency that would help to improve your credit score.

Borrowed Down Payment with “non-traditional” resources are no longer allowed

The borrowers are no longer be able to submit a down payment with borrowed money, from the unsecured lines of credit, unsecured personal loans, and even credit cards.

The CMHC says that the borrower must provide the down payment from their own resources. These can include personal savings, investments, equity from the sale of the house or property, financial support from relatives, or a government grant.

Debt Service Ratio Decreases

A debt service ratio calculates and determines how much an applicant can afford to borrow. The new CMHC mortgage rule lowering the maximum Gross Debt Service (GDS) from 39% to 35%, and the maximum Total Debt Service (TDS) from 44% down to 42%.

The GDS ratio gauges the amount of your monthly after-tax earnings that you’ll need to use to pay for any monthly expenses associated with owning a property. These include mortgages, proper tax, heating bill, condo fees (only if you are looking to buy a condo).

TDS ratio still takes into consideration all the same expenses (mortgages, proper tax, heating bill, condo fees) as the Gross Debt Service. It also looks at how much your monthly income is going towards debt repayments such as car payments, credit cards, lines of credit, and other loans are included.

The stress test requires lenders to validate that a borrower can still make their monthly mortgage payment even if interest rates go up and the mortgage stress test remains unchanged.

How They Affect Home Buyer

Although, this new mortgage rule affects home buyers. Borrowers must have a high credit score and low debt ratio to qualify for a high-ratio mortgage (e.g, less than 20% down payment for a mortgage). Applicants can avert this by having a more than 20% down payment, as these are not based on eligibility for CMHC coverage.

Basically, it reduces the buying power of potential homeowners. Many people are experiencing financial struggles during this pandemic, which leads them to get into more debt and affect their credit score.

Where to Get a Mortgage Loan with Poor Credit

If you don’t have enough credit score to qualify for the new rules of CMHC, do not panic. They are not the only issuer of mortgage default insurance. There is numerous private insurance provider that do not require the same criteria that CMHC does. However, expect little changes from mortgage default premium between private provider and CMHC. A private provider possible has a higher mortgage default premium that CMHC.   

Final Thoughts

Getting a mortgage does not need to be so difficult, as long as you are prepared, you can avoid some burden that unprepared people are experiencing. The CMHC protects lenders from further losses due to the ongoing pandemic. As well as the borrower to avoid being in debt and not being able to make repayment.

If you need any assistance regards to new CMHC mortgage rules, we are happy to assist you.

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