Do You Care That July 1st CMHC Is Tightening Mortgage Insurance Qualification Rules?
Last week CMHC announced that they have decided to tighten up qualification rules for insured mortgages.
Why Is CMHC Changing Qualification Guidelines?
It is no secret that COVID-19 has caused the housing market to slow to a snail’s pace. Housing sales fell 15% in March followed by the worst sales level for April in 36 years. They based the decision on these facts combined with projections that forecast housing prices will fall between 9% and 18% in the next 12 months. They are also projecting that COVID-19 will cause Canada to enter a ‘historic recession in 2020’
Who Does This Change Affect?
These rules will affect borrowers who are putting less than 20% down on a purchase that is required to get default insurance though CMHC.
CMHC’s First Change
In order to understand the first change you must understand GDS – Gross Debt Service and TDS Total Debt Service. Lenders and insurers use these numbers to determine if you are able to afford to live life after acquiring a mortgage. No one wants to be house poor! The lenders do not want their borrowers to be house poor! However, what the lenders are actually trying to achieve is to calculate the probability of each mortgage going into default.
A GDS ratio is: the percentage of your income needed to pay all of your monthly housing costs including principal, interest, taxes and heat.
A TDS ratio is: the same as GDS however in this calculation we add in other additional monthly expenses. For example, car payments, student loans, credit card payments and so on.
The first major change CMHC has implemented is lowering GDS percentage from 39% to 35% and TDS from 44% to 42% of your income. I calculate this as a 10-16% reduction in mortgage money qualification.
CMHC’s Next Change
CMHC has also announced that one of the borrowers must have a minimum credit score of 680 up from 600. This change probably will not destroy many borrowers chances as most lenders already required a credit score of 680 in order to obtain an approval.
CMHC’s Third Change
CMHC has eliminated non traditional sources of down payment that ‘increase indebtedness’ This basically means you are no longer allowed to borrow down payment. Financial gifts from family members are still permitted as long as they are not required to be repaid
Bring On The Private Insurers!
Believe it or not the proposed rule changes from CMHC will probably not alter the mortgage market as drastically as originally expected. CMHC is a Crown Corporation
'A crown corporation is any corporation that is established and regulated by a country’s state or government. This is the opposite of private companies, which are privately owned, structured, and operated to serve the owners of the company. The government commercially owns a crown company.'
There are two privately owned companies within Canada that are also in the mortgage default insurance business:
Canada Guaranty
Genworth Financial
I am not sure if CMHC expected the private insurers to follow suit with the qualification changes however Genworth recently announced that they will not be changing their qualification criteria. Canada Guaranty is also not expected to make any changes.
The private insurers have appeared to come to the rescue to allow borrowers the opportunity to enter the market a little easier however there are select lenders who will only work with CMHC.
Longs story short, these changes may not actually change your ability to get a mortgage depending on your specific scenario.
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