Given The COVID-19 pandemic and it’s impact in the housing economy CMHC announced changes to its mortgage insurance underwriting criteria on Thursday June 4th.
Effective July 1st the following changes will apply for new applications for homeowner transactional and portfolio mortgage insurance through CMHC.
- The maximum gross debt service (GDS) ratio drops from 39 to 35
- The maximum total debt service (TDS) ratio drops from 44 to 42
- The minimum credit score rises from 600 to 680 for at least one borrower
- Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes
Outside of the higher credit score requirement and more restrictions surrounding the source of down payment, what does this mean to the borrower? It will ultimately reduce their maximum buyer power when qualifying under CMHC regulations. We feel that it is prudent to educate any potential buyer of how this change could effect their purchase after July 1st 2020.
Here are a few examples based on household income and maximum affordability:
- Scenario based on Household Income of $70,000
- Maximum Purchase Price Today: $350,000.00
- Maximum Purchase Price After July 1st: $300,000.00
- Scenario based on Household Income of $100,000
- Maximum Purchase Price Today: $500,000.00
- Maximum Purchase Price After July 1st : $450,000.00
- Scenario based on Household Income of $130,000
- Maximum Purchase Price Today: $650,000.00
- Maximum Purchase Price After July 1st: $600,000.00
It is important to note the CMHC announcement release states: “These decisions are within CMHC’s authorities under the National Housing Act.” This is not a directive from the Ministry of Finance and as a result, Canada’s other two mortgage insurers (Genworth Financial and Canada Guaranty) have opted out of this change and will be operating under existing lending guidelines.
Although Canada’s two other private insurers have opted out of the change, we believe that underwriting will ultimately tighten with all insurers. There will be a heavier weighting on job and industry stability, the credit worthiness of a borrower and the absolute need for a client to have fallback and assets will be more important then ever.
- Does the mortgage need to be approved or funded by July 1st to beat the new criteria?
- Provided an offer is in place prior to July 1st the guidelines for lending will be based on existing policy and not the new criteria. The possession could be a year down the road or more. CMHC is not policing the possession date.
- Do lenders accept Genworth or Canada Guaranty with the same value as CMHC?
- When the lender submits an application, the lender notes that they need insurance through one of the other providers, due to CMHC’s rule changes. What’s really important is that not all banks work with the other two insurers. There are only about 65% of the banks and lenders that have all three insurers, and often times when the lender has a tricky file, the lender needs to go to all three insurers before finding one of them who will approve the deal. This is a benefit to working with a broker who can shop all banks vs. a client going into a bank that may only have access to two insurers.
Assumptions based on no outside debts, a property without condo fees and property taxes based on the City mill rate