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New rules for buyers: Breaking down revised CMHC rules

If you’re looking to buy a house this year, you might be facing some new CMHC rules…

In response to COVID-19’s affect on all aspects of the Canadian economy, CHMC (Canadian Mortgage Housing Corporation) is changing the underwriting policies for new insured mortgages and introducing new CMHC rules. CMHC expects that housing prices will fall 9%-18% over the next 12 months in Canada, however experts say that Ottawa’s market is likely going to remain stable due to Ottawa’s strong economy and ability to weather the pandemic.

So what can you expect with the new CMHC rules?

The changes will be effective July 1st 2020 and include a few new rules. If you’re an owner of a multi-residential building, for example, CMHC will “suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing.”  The most notable changes, however, include tightened restrictions for qualifying first-time buyers who are purchasing with a down payment of less than 20%. 

As part of Canada’s first-time home buyers incentive, first-time buyers are  able to put as little as 5% down on a property but will require to pay for CMHC mortgage insurance. CMHC mortgage insurance is mandatory for anyone looking to put less than 20% down on a home.

The updated guidelines to qualify for CMHC mortgage insurance are as follows…

One borrower’s credit score must be 680 or more

As part of the new rules, at least one borrower must have a credit score of 680, up from 600 previously, in order to qualify. That means that one borrower must be in the “good” range.

You can check your credit score through your bank, Equifax, TransUnion, and many other online platforms. If you’re interested in learning about how to improve your credit score, you can check out the government of Canada’s suggestions here. 

Gross Debt Service Ratio of 35% or less

The new rules state that buyers must have a gross Gebt Service Ratio (GDS) of 35% or less, down from 39%.

GDS, or “Gross Debt Service Ratio” refers to the ” proportion of housing debt that a borrower is paying in comparison to their income.”

Basically, this ratio determines affordability relative to your income. You can learn more about how this is calculated on CMHC’s website. 

A maximum Total Debt Service Ratio (TDS) of 42%

As of July 1st 2020, buyers must have a maximum Total Debt Service Ratio (TDS) of 42% or less, down from 44%.

TDS, or Total Debt Service Ratio refers to ” is a debt service measurement that financial lenders use as a rule of thumb when determining the proportion of gross income that is already spent on housing-related and other similar payments.”

Similar to above, you can visit the CMHC website to see how this is calculated.

Where you get your down payment

The final major change taking place is where first-time buyers source their down payment.

According to the CMHC website, “Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes”

Simply put, your down payment can’t be extra debt, like a line of credit. It will need to be in the form of money that isn’t borrowed from a financial institution. Your down payment will have to be sourced the old fashioned way – through savings or gifts from family.

Why are these changes being implemented?

In short, these changes are being implemented in order to protect the housing market, and in turn, people’s investments. The new measures will ensure that more qualified buyers are entering the market.

With job losses, business closures, and a drop in immigration (due to COVID-19) affecting the market, these measures will help protect the housing market from further and irreparable damage.

June expected to be a busy month…

With these changes, June is expected to be a very active month for buyers in Canada as people rush to purchase property before the new regulations are enforced.

Are you a new buyer and nervous about the new rules? Contact us! We’re experienced in working with first-time buyers and have helped dozens get on the property ladder!

*DISCLAIMER – the sources used and information obtained do not belong to the Christine Hauschild Real Estate Team and all original sources are all linked in the hyperlinks. We do not claim ownership of any of the information stated in this article and it is not meant to solicit those already under contract*

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