The Canadian Mortgage and Housing Corporation (CMHC) announced on June 4, 2020, about the certain and unavoidable changes to the eligibility rules for mortgage insurance. It is the agency’s latest response to the current pandemic. The new rules will lower the amount of debt a home applicant for an insured mortgage can carry, set a better credit score to qualify for CMHC insurance, and will require a homebuyer to use their personal, and not borrowed, funds for their down payment. You can also check out https://realtormontreal.ca/ for the latest updates.
The 2019 coronavirus has exposed long-term vulnerabilities in our financial markets, and experts believe that we must act now to protect the economic futures of Canadians. CMHC offers insurance that protects lenders if homeowners default on the payment of their mortgage. If a buyer has a down payment below 20% of the total purchase price, mortgage default insurance is automatically required and is paid by the homeowner. Other properties, including those with a purchase price of more than $1 million dollars, are not eligible for CMHC insurance.
The new rule changes will establish housing markets by decreasing the public demand and putting a damper on unsustainable housing price growth. These changes are designed to provide housing market stability as CMHC foresees price drops
Here are the most significant changes:
Less debt as a percentage of gross income
Old rule: Buyers with good records of credit scores and reliable income could spend up to 39% of their gross income on housing. This includes their mortgage, property tax, heating bill, and half of the condo fees. They could also borrow up to 44% of gross income once credit cards, car payments, and other relevant loans are included.
New rule: All buyers will have a limit in spending up to 35% of their gross income on housing, and can only borrow up to 42% of gross income once other loans are already included.
New minimum credit score established
Old rule: Under the regulation, for an applicant to qualify for an insured mortgage at least one borrower or their guarantor must have a minimum credit score of 600, which is only noted as “fair credit“ according to standard guidelines.
New rule: The new rules increase the minimum credit score required to 680. This means that the buyers will need a good credit score in order to qualify.
No more borrowed down payments
Old rule: In order to complete the required down payment, a homebuyer could use unsecured personal loans, unsecured lines of credit, and even credit cards. The minimum downpayment is 5% for houses valued $500,000 and below, and 10% of the amount over $500,000, up to $1 million.
New rule: Borrowers must provide the down payment from their personal resources. These can include personal savings, equity from the sale of a property, a non-repayable financial gift from a relative, funds borrowed from other persons, liquid financial assets, against other owned real property, or a government grant.
The latest announcement of CMHC comes as the Canadian economy in general, and the housing market itself, grapples with probable uncertainties in the wake of the COVID-19 pandemic. National sales data shows the volume of home-buying and -selling has dropped drastically compared to the same period last year.