If you’re looking to buy a home in the near future, especially your first home, you may find it a little more difficult to qualify for a mortgage. The CMHC has recently tightened its requirements for homebuyers who have a down payment for a home of less than 20%.
While this may not be as big a blow for people buying their second or third home, first-time home buyers are looking at one more obstacle.
Here’s what you need to know.
What is the CMHC?
CMHC stands for Canada Mortgage and Housing Corporation, which is a crown corporation run by the Government of Canada. Its job is to essentially provide stability in the Canadian housing market by helping lenders across the country more easily raise the funds they need to give out new mortgages.
It also assists with creating more affordable housing options and helps the Federal Government through unbiased research and advice.
What are the new CMHC rules?
The CMHC takes care of mortgage default insurance, which is in place in case you can’t make a payment on your home. If your down payment is less than 20% of the purchase price of your home, the cost of these insurance fees is automatically added to your mortgage.
As of July 1, 2020, home buyers can no longer use borrowed funds for their down payment.
Credit score requirements have also been increased, meaning at least one person on the mortgage will now have to meet a higher credit score threshold in order to get a mortgage. As well, the amount of debt you can carry compared to your income has been lowered.
How will this affect my ability to buy a home?
If you don’t have the cash to make a 20% or more down payment, you’re going to have a more difficult time qualifying for mortgage default insurance through the CMHC. You won’t be able to use funds from, say, a line of credit or another loan to pad your down payment.
You’ll also have to keep an eye on your credit score — at least one person on the mortgage will need a credit score of at least 680, which is up from the previous minimum of 600.
How much debt you’re carrying will also affect how large of a mortgage you can afford. Essentially, if you have no pre-existing debt and only a 5% down payment, you’ll be able to afford a mortgage that is 11% lower than what it was before the change in rules.
The more debt you have compared to your income, the lower the mortgage you’ll be able to afford.
What can I do?
The biggest thing is to try to save a down payment of at least 20%. While this may make it more difficult for you to get into the home you want right now, it will make it easier to qualify for a mortgage right now.
The other thing is to try and pay down any pre-existing debt before looking at getting a mortgage. The less debt you’re carrying — zero is the best! — the more you’ll be able to afford.
If you’re already looking into buying a home, then add mortgage pre-approval to your list. This is an important first step when buying a home, and it’s even more important now that CMHC rules are changing.
Questions?
If you’re looking to buy a home or have any questions about the mortgage pre-approval process, call or text Gino Cipriano today at 204-955-5853 or send him an email. He’ll be able to give you peace of mind and even put you in touch with qualified mortgage brokers who can more fully answer your questions.