Being eligible for Canada Mortgage and Housing Corporation (CMHC) mortgage default insurance became more difficult since July 1st, 2020 when borrowers were required to meet stricter underwriting policies.
- CMHC’s underwriting guideline changes included: lower debt service ratios; higher credit scores; and restrictions from borrowing for down payment purposes
- The rules were announced following the release of CMHC housing forecasts that predicted a decline of between 9% and 18% in home prices
- Private mortgage insurers Sagen and Canada Guaranty didn’t follow suit with stricter underwriting requirements, which means it’s now easier to quality for the private mortgage default insurance offerings
Changes to CMHC underwriting guidelines
CMHC’s underwriting guideline changes include: lower debt service ratios; higher credit scores; and restrictions from borrowing for down payment purposes.
Credit score changes
The new rules included increasing the acceptable minimum credit score required to be considered for a mortgage (mortgage default insurance is mandatory on all home purchases where the borrower is making less than a 20% down payment).
Your credit score is used by lenders to determine whether you qualify for a mortgage and the amount you can expect to borrow. Expressed as a three-digit number between 300 and 900, your credit score is based on your credit history, which is a record of your debts and your ability to repay them. Traditionally, the higher your credit score, the better your chances of obtaining a mortgage.
The minimum credit score to qualify for a mortgage with CMHC insurance was 600. As of July 1st, 2020, the minimum score rose to 680 for at least one borrower on the property. (See: Do You Understand Your Credit Score?)
Housing markets have yet to decline following CMHC predictions. In fact, most housing markets across Canada have experienced incredible growth in 2020 and 2021 seems to be following the same trend.
Debt service ratio changes
The new rules reduced the maximum debt service ratios for CMHC-insured mortgages. Lenders use a number of calculations to determine the maximum loan amount you can receive. In order to measure your expenses relative to your income, they calculate your gross debt service ratio (GDS) and total debt service ratio (TDS). As of July 1st, 2020, both of these percentages were reduced, making it harder to qualify for a mortgage protected by CMHC insurance:
- GDS – this calculation is used to determine the proportion of your income that you pay each month to own your home. Lenders estimate your annual mortgage payments, property taxes, heating costs and 50% of condo fees, if applicable. This total is then divided by your gross annual income to reveal a percentage. As of July 1st, 2020, GDS requirements tightened from 39% to 35%.
- TDS – this calculation starts with your GDS percentage and adds any other monthly payments you have including loans or outstanding credit card debt. This figure is then divided by your gross annual income. As of July 1st, 2020, TDS requirements tightened from 44% to 42%.
Down payment changes
The new rules mean that aspiring homeowners are no longer able to borrow money for their down payment. This includes unsecured personal loans and lines of credit.
Saving for a down payment is one of the largest obstacles faced by first-time home buyers across Canada. Fortunately, mortgage default insurance enables borrowers to qualify for mortgages with less money down
Why implement new CMHC rules now?
The rules were announced in the summer of 2020 following the release of CMHC housing forecasts that predicted a decline of between 9% and 18% in home prices over the next year, due in large part to high mortgage debt and increased unemployment.
CMHC says the tighter mortgage lending rules are designed to help curtail the negative impacts to Canada’s housing markets and protect riskier borrowers in the wake of COVID-19.
Are these changes increasing or decreasing buying power?
These changes decrease buying power because the new rules make it more difficult to qualify for a mortgage backed by CMHC insurance.
Private insurance vs CMHC
Private mortgage insurers Canada Guaranty and Sagen (formerly Genworth Financial) didn’t follow suit with CMHC in tightening underwriting policies for mortgage default insurance. This means it’s easier to quality for their mortgage default insurance offerings. Borrowers must meet these terms:
- Gross Debt Service ratio minimum 39%
- Total Debt Service ratio minimum 44%
- Credit score minimum 600
- Borrowed down payment is possible
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