How Will the New CMHC Rules Affect Home Buyers?

In response to COVID-19, CMHC has introduced stricter criteria for home buyers to get approved for mortgage default insurance. This insurance is mandatory for home buyers who have a down payment of less than 20%. The new rules come into effect on July 1, 2020.

This week, Canada Mortgage and Housing Corporation (CMHC) announced that as of July 1, there will be stricter lending rules for home buyers in response to the COVID-19 pandemic. While some Canadians will be affected—such as those with a credit score lower than 680, or who are carrying consumer debt, or home buyers who intend to use funds that "increase indebtedness" for their down payment—there may be no need for you to worry as a home buyer. 

CMHC provides mortgage insurance that protects lenders if homeowners default on their mortgage. Mortgage default insurance is required if a buyer has a down payment of less than 20% of the purchase price of the home. 

"CMHC foresees a 9% to 18% decrease in house prices over the next 12 months. In order to protect future home buyers and reduce risk, CMHC is changing its underwriting policies for insured mortgages." 

Read more from CMHC here

The COVID-19 pandemic has affected many sectors of Canada’s economy and has left millions of Canadians feeling uncertain about their financial future. Entire industries have been forced to pivot on a dime in order to respond to the short-term impacts, as well as the expected longer term aftermath that the pandemic may cause in the economy. According to CMHC, these changes are designed to create stability in the housing market, as CMHC predicts that housing prices will drop over the next 12 months. 

There are three key changes to CMHC's qualifications that will come into effect on new applications as of July 1: 

CMHC will require you to have less debt 

CMHC will now limit the gross debt service ratios on home buyer loans to 35%, from 39%. It will also limit the total debt service ratio to 42% from 45%.

Use CMHC's free Debt Service Calculator to get an idea of what that means for you. 

CMHC will require a higher credit score

CMHC will also raise the minimum credit score needed to qualify by 80 points. The new rules will require at least one borrower on the application to have a credit score of 680 or higher, increased from 600. This change is expected to have an effect on first-time buyers. 

A lot of things could damage your credit score, from a history of late payments to a life event such as a divorce. Having a thin credit profile could also result in a low credit score, which is something that young Canadians and new Canadians might face—it just means you haven't built up your credit enough! Take a look at the Credit Score section of goeasy Academy for more ways to build good credit.

CMHC will not allow you to pay your down payment with borrowed funds

CMHC will not allow home buyers to use borrowed funds that increase the borrower's debt for their down payment. For example, CMHC won't accept funds from a line of credit or a cash advance from a credit card. A financial gift from a family member is allowed as long as the funds are truly a gift and are non-repayable. 


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What do the new CMHC home buyer qualifications mean for me? 

CMHC’s changes may reduce some home buyers’ purchasing power. According to a report from RateSpy.com, they could reduce home buyers' buying power by up to 11%. 

The biggest impact will come from the regulations around consumer debt and credit score. Banning the use of borrowed funds to finance down payments is expected to have the smallest impact, since most Canadians rely on savings, investments and financial help from family for down payments anyway.

Don't think you'll qualify based on the new CMHC guidelines? Mortgage default insurance is available from CMHC as well as private companies. While CMHC is the largest provider in Canada, you can obtain mortgage insurance through another private providers. Your mortgage broker can help you get approved for the best rate possible for your personal situation. While the new CMHC rules do not apply to Canada’s private mortgage insurers, private insurers have not yet announced if they will align with CMHC.

Mortgage insurance is also not required if you have a down payment of 20%. If you're selling a home or have savings, and are planning to buy a property with a down payment of at least 20% of the purchase price, the new CMHC rules won't affect you. 


Sources: 

https://biv.com/article/2020/06/strict-new-mortgage-rules-kick-july-1  

https://www.moneysense.ca/spend/real-estate/cmhc-tightens-mortgage-rules-in-latest-response-to-covid-19/ 

https://www.cmhc-schl.gc.ca/en/media-newsroom/news-releases/2020/cmhc-reviews-underwriting-criteria 

https://www.mortgagebrokernews.ca/news/cmhcs-new-minimum-beacon-requirement-whos-going-to-suffer-330478.aspx  

 

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