CMHC New Mortgage Underwriting Policies
Effective July 01, 2020
CMHC (Canada Mortgage and Housing Corporation) announced they will be implementing new changes to protect future home buyers and reduce risk. This change is due to the COVID-19 Pandemic and the effect it has had on all sectors of Canada’s economy.
As of July 1, it will become more challenging for new applicants seeking to obtain mortgage insurance for a home purchase. These new underwriting policies for insured mortgages will affect those with less than 20% down payment.
Here are the 3 new CMHC policy changes and what they mean for homebuyers:
1. Maximum Loan Amount
The first change in the policy is that CHMC is limiting the Gross and Total Debt Servicing (GDS/TDS) ratios to standard requirements of 35/42 from the current ratios of 39/44.
What does GDS/TDS mean?
- GDS (Gross Debt Service) means that a maximum of 35% of your gross annual income can be used for certain home-related expenses such as your mortgage, property tax, condo fees and heat.
- TDS (Total Debt Service) means when you combine the home-related expenses (we got with GDS) with all your other monthly debt payments such as credit card and car payments, then your total payment should not exceed 42% of your income.
2. Minimum Required Credit Score has Increased
The second policy is that the Canada Mortgage and Housing Corporation will also establish a minimum credit score of 680 for at least one borrower.
When buying a house, mortgage lenders want to know that you won’t default on your mortgage and your credit score is a good indicator for lenders on how you can efficiently manage your finances. Your score also affects the interest rate lenders will offer you. If you don’t have a minimum credit of 680 but only have 20% down, then CMHC will not be able to insure it.
3. Down Payment
For the third and final policy, the official statements says that “non-traditional sources of down payment that increase debt will no longer be treated as equity for insurance purposes”.
Typically, the most common source of mortgage down payment is your savings. However it can also include money in your chequing/savings accounts, RRSP, Tax Free Savings Accounts (TFSAs), GICs, stocks, or other types of investments. These are all considered traditional sources of down payment.
You could also use funds that are given to you as a gift from your parents, grandparents or siblings as a traditional source.
Everything else would be considered untraditional and would no longer be treated as equity for insurance purposes.
Do you have any questions about traditional and non-traditional sources of down payment? Make a request and speak with an expert
During these uncertain times, CMHC’s new policies will further manage the risk to their insurance business, and ultimately taxpayers. They have also suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing.
Under the National Housing Act, CMHC will continue to monitor market conditions and work with their federal colleagues to mitigate risk and as the COVID-19 Pandemic continues, we may continue to see more changes to mortgage underwriting criteria.