CMHC Buying a House
Canada Mortgage and Housing Corporation (CMHC) is Canada's national housing agency. This government agency has grown to be Canada's top provider of mortgage loan insurance, mortgage-backed securities, and housing policy and programs. CMHC insures certain loans that banks make, and determines the policy and parameters under which the banks can make loans.
CMHC recently announced major changes designed to tighten up the mortgage process that will impact all insured (high ratio) mortgages. ("High Ratio" mortgages are loans where you have less than 20% per cent downpayment). In an effort to clarify the details of these changes, which will be far reaching in their effect on the real estate market in Canada, here is a summary, with further explanations and translation "in Plain English".
These new rules will affect you if you are buying a property to rent out (i.e. not occupying it yourself), and they will especially affect you if you are self employed, or if you are a salesperson earning commission.
So here are the changes as posted by CMHC, with further explanations in plain English:
CMHC MORTGAGE RULES
1) All changes are effective April 19, 2010 with exception to changes 7 & 8 which take effect April 9, 2010.
2) Qualifying rate - For high-ratio insured loans with fixed term of less than 5 years and for all variable rate mortgages, regardless of the term, the qualifying interest rate is the greater of: the benchmark rate and the contract interest rate. The benchmark Bank of Canada's 5 year interest rate is the average of the 5 major banks posted 5 year rate and essentially, this will be the new qualifying rate for shorter term mortgages and variable rate mortgages. It moves the current qualifying rate from 3.40% to 5.39% for those with less than 20% available to use as a down payment.
In Plain English: you will have to qualify as if you were taking the regular non-discounted 5 year fixed posted rate, even if you are getting a lower, shorter term discounted rate....either fixed or variable...
3) Refinance loan to value maximum will be 90%
In Plain English: If you are refinancing your house (taking equity out of the house in a line of credit, for example), the maximum amount of loan you can have is 90% of the appraised value of the house..(this was formerly up to 95%)
4) Maximum loan to value for rental (non owner occupied) will be 80% LTV 1 to 4 units.
In Plain English: If you are purchasing an investment unit which you intend to rent out, you must have 20% down payment.
5) Rental income qualification. 50% of the gross rental income from the subject property may be included into the borrower's gross annual income for the purpose of calculating the borrower's Total Debt Service Ratio.
In Plain English: If you are using the rent that you will receive as part of your income in order to qualify for the loan on a rental property, you can only claim one half (50%) of that rent as your actual income....
6) Maximum numbers of Units under CMHC Second Home product only available for 1 unit owner occupied properties.
In Plain English: in the past, CMHC provided loan approvals for a 'second' home with anywhere from 1 to 4 units - so you, the buyer, could purchase a triplex or a fourplex as a 'second' home, with no additional underwriting requirements or premium surcharges for this second home - only standard premiums would apply. Now, the 'second home' program will be restricted to only single unit owner occupied properties (i.e. a cottage)..
7) Changes to CMHC Self Employed Program will be effective April 9th, 2010. For purchase and portability the maximum LTV will be 90%. For refinance the maximum LTV is 85%. Also qualification rules have changed for this product. If the borrower has been self employed in the same business for more than 3 years, they are NOT eligible under the CMHC Self Employed Program without traditional third party validation of income (i.e. tax assessment). CMHC will continue to require that the borrower have a minimum of 2 years experience in the same field. This can include time spent working as a non self employed worker in the same field. Lenders are expected to obtain a copy of the business or GST license or Articles of Incorporation. Therefore if the borrower has been self employed for over 3 years, they must be qualified. If the buyer is self employed for less than 3 years, previous rules apply.
In Plain English: In the past, self employed persons could use their 'gross income' to qualify for a loan. In addition, until now, many self employed persons without traditional forms of income validation could still get CMHC insured financing for purchase of up to 95% loan-to-value ratio (90% for refinance) for a 1 - 2 unit owner-occupied property.
In the past, the bank was simply required to ask the borrower if their income taxes were current - no documentation was required for borrowers who had difficulty providing traditional third party income validation.
Effective April 9, now this income must be "validated" by a third party, typically Revenue Canada. That is one problem - but there is another; when the validation is your tax assessment from Revenue Canada (from your last year's tax filing), that assessment is based on what you claimed as your 'net income' ....and as self employed people typically claim their business expenses to reduce their gross income down to a smaller net income, now, they will only be able to qualify on their net income. This is going to create problems for people who are self employed. These new rules only apply to people who have been self employed for 3 years or longer.
Over and above all the changes pertaining to verified income, if you are self employed, you will also need to have at least 10% down payment. You will no longer be able to buy with just 5% down.
8) Commissioned income will no longer be eligible for the CMHC Self Employed Program without traditional third party validation of income.
In Plain English: If you are a commission sales person, you will only qualify on your net income (same as self employed)....
This is a short summary of the CMHC mortgage rule changes which are taking place in April, 2010. These changes will impact self employed and commission-based sales people no matter where they are buying a home in Canada. Questions? Just email us using the chat function on the main page, and we will be there for you!
