It’s no surprise that the housing market has recently come under a lot of pressure due to COVID-19. It’s put a lot of pressure on all of us! But, this pressure pushed one of Canada’s mortgage insurers, Canadian Mortgage & Housing Corporate (CMHC) to change its underwriting policies for insured mortgages.
Watch our recent Questions With Quantus where we dive into these three changes.
We looked through each of the CMHC’s three changes and have our own takeaways for how you could be affected.
Change 1: Tightening Your GDS/TDS Ratio
Are you looking to put down less than 20 percent on your new home? The amount you can be pre-approved for has probably changed with CMHC. With all lenders, they want to know how much you can afford with your current gross income. This calculation is your Gross Debt Service Ratio (GDS).
The previous GDS ratio through CMHC was 39 percent and has now dropped to 35 percent. But how does that change your pre-approval? Here is an example of a family looking for their first home.
We’re using the following facts in our example:
Family has a gross annual income of $120,000
25-year amortization* Using today’s qualifying rate
Estimated to pay $5,000 a year in property taxes
After running the numbers, we calculated that they would have been pre-approved for $585,155 using the previous GDS. Now, there is almost $70,000 less in their pre-approval with the new GDS. Essentially, the CMHC made the qualifying rate 1.4 percent higher than today’s qualifying rate for you to be pre-approved for the original amount.
Change 2: Tightened Credit Score For One Borrower
The second change that CMHC made was that one borrower has to have a minimum credit score of 680. What’s our concern with this change? Our broker, Jacqueline Jeffries shared her perspective.
“The clients that I’ve been looking at, they’ve been making their payments, but their debt utilization is a bit higher [because of the pandemic] so that’s bringing down the score. It’s not necessarily they had done anything wrong, but they could have been going in with 700 before the crisis. But now CMHC dropped the score below at least 680 for one borrower, that will be impacting them when they have done nothing wrong on their credit.” Jacqueline Jeffries
It’s an important time to be watching your credit score regardless of if you’re thinking of buying a home. Our #1 tip? Make sure you’re making payments, even minimum payments, on time!
Change 3: No Borrowed Down Payment
The final lending change from CMHC is that non-traditional down payments that increase your debt are no longer accepted. For example, a borrowed down payment, what we call a ‘flex down first-time homebuyer,’ used to allow first-time homebuyers to borrow money with an unsecured line of credit or loan for their down payment.
Our Co-owner, Paul Bojakli, pointed out in our interview that borrowed down payments are “synonymous with the first-time homebuyers…there are some workarounds that you can look at, but that’s an opportunity lost [for getting a new home].”
Can I Still Get a Mortgage?
YES!
While these changes sound a little doom-and-gloom, we have to stress that you still have options. Everyone’s situation is different. It is just about finding the right financial plan for you.
These changes only affect one of the three insurers in Canada and only if you’re putting less than 20 percent down.
You can always talk to your mortgage broker if you want to learn more about your GDS/TDS ratio, discover your credit score or just to have a chat about the general chaos of life.