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Canadian Mortgage and Housing Corporation Mortgage Rules
The Canadian Mortgage and Housing Corporation (CHMC) provides mortgage insurance for loans approved for buyers who want to buy a home while putting down less than 20 percent of the agreed purchase price as a down payment. The Canadian Bank Act forbids the majority of lending institutions under federal regulation from granting mortgages for more than 80 percent of the home’s purchase price without a mortgage loan insurance policy in place. Receiving CMHC mortgage loan insurance allows you to finance as much as 95 percent of the home’s purchase price. If you want to go through a traditional lender to purchase your home but don’t have 20 percent to put down right away, this is a policy you will have to have in place. This article covers the general cmhc rules associated with gaining approval for a CMHC policy.
The CMHC Rules
1. The house must be located within the borders of Canada.
2. In most cases, you have to provide at least the minimum (5 percent) down payment from your own money. However, if you are purchasing a dwelling between one and four units, it is acceptable to use a gift from an immediate family member for the down payment. For borrowers who otherwise qualify for the property, such vehicles as lender incentives and funds borrowed from other sources are allowed. Call one of our mortgage specialists at Amansad Financial to get information about your own situation.
3. The total debt load you are carrying should not be in excess of 42 to 44 percent of your gross household income. This number is also referred to as the “back end ratio,” and it includes mortgage payment, mortgage insurance, any homeowner’s association dues, real estate taxes, as well as payments on all of your other debt — things like your car payment and outstanding payments on credit cards. CMHC will generally not approve an application that shows a back end ratio higher than 40 percent, although you can go as high as 50 percent if you put at least 25 percent down. If you put 50 percent or more down, lenders will overlook back end ratio.
4. Your “front end ratio,” which just includes housing expenses (principal, interest, taxes, and heating bill) should not take up more than 32 percent of your gross income.
Items #3 and #4 are particularly important given the way that mortgages work in Canada. Most people do not pay off their entire mortgage during the term of the loan. Instead, they amortize the balance of their loan over a period of time like 15, 25 or even 30 years. However, the longest term for a loan that you can sign is 10 years. At the end of that time, you can renew your loan with the same lender or shop around for a different deal. This might seem like a benefit for the homeowner, but it really protects the banks from having to lock in at a low rate for the entire life of the loan. At the renewal time, you have to accept the interest rates in the market at that time. Given that rates are historically low now, it is likely that you will face higher rates at renewal. You will want to calculate the potential costs for higher interest rates at renewal and see if you will still be able to afford the house. Of course, if you have a larger down payment on hand at that time, you will be able to avoid the mortgage insurance premiums at renewal.
5. CMHC mortgage loan insurance takes into account your closing costs when calculating the amount of financing that they will insure you to carry. Land transfer fees, legal costs and other fees can run between 2 and 4 percent of the purchase price of the home and are often due at closing. If you don’t have the seller agreeing to pay those as part of the transaction, they will be figured into the financing that goes into the loan, unless you have additional funds to pay for those at that time.
The Canadian Mortgage and Housing Corporation (CMHC) insures mortgages for lenders; the purpose of the coverage is to keep the lender from suffering a loss should you default on your loan. In most cases, the lender has the borrower pay for the cost of the coverage, and when you apply for a loan, these costs appear on your statement when applicable. Some traditional lenders (mostly banks) do not pass along an insurance cost if you are putting 20 percent down on the home purchase, but if you are putting down less, you can expect to have this included in your loan cost.
An Overview of CMHC Fees
The exact CMHC fees vary depending on the size of your down payment and the amount of your loan. The smaller a percentage your down payment represents of the purchase price, the higher you can expect your fees to be. Some lenders will charge more in administrative fees and a higher interest rate if mortgage insurance is not part of the package, so be sure to talk to your lending officer to see the exact details of your application.
At the current time, here is how CMHC fees break down. If your loan to value (LTV) ratio is 65 percent or lower, the premium on the total amount of the loan is 0.60%, and the premium on an increase to your loan total for refinancing or portability is 0.60%. Between 66 and 75 percent LTV, the premiums are 0.75% and 2.60% respectively. Between 76 and 80 percent, the premiums are 1.25% and 3.15%. Between 81 and 85 percent, the premiums are 1.80% and 4.00%. Between 86 and 90 percent, the premiums are 2.40% and 4.90%. Between 91 and 95 percent, the premiums are 3.15% and 4.90%. When LTV is between 90 and 95 percent, the premium on the total loan is 3.35%.
There are several other provisions in the CHMC procedures that are worth knowing. In Ontario, Quebec and Manitoba, provincial sales taxes apply to the premiums. The good news, though, is that the lender cannot include those taxes in the amount of the loan.
If your LTV is higher than 80 percent, the premiums for portability do not apply to refinancing. For portability, the LTV cap is 90%, but it is acceptable to look at higher ratios if the new ratio is the same or less than the original.
The CMHC only recognizes certain sources for a valid down payment. These include the savings of the borrower, withdrawal from RRSP funds, funds that are taken out against valid assets, unencumbered land, proceeds from selling another property, sweat equity, an equity grant, or a gift from an immediate relative. Other sources, such as arm’s length borrowed or given funds, cash back sweeteners from the lender, or a payment that is 100% sweat equity, are considered nontraditional and can be a barrier to approval.
If you are considering taking out a traditional loan to finance the purchase of a home or property, talk to one of our mortgage experts at Amansad Financial. We have expertise with a wide variety of lending options that can eliminate the necessity of mortgage insurance and bring you a better deal, with our alternative financing strategies. Give us a call today!
Amansad Financial has helped many clients navigate the process of finding financing for their real estate purchases, both through traditional lenders as well as through private lenders and other alternative financing sources. If you are a first-time homebuyer, having the advice from one of our mortgage professionals can be quite valuable and can help you signing onto a deal that ends up costing you money over time. Give one of us a call today, and we will evaluate your individual situation and make recommendations as to the best solution for your needs.