CMHC to facilitate affordable housing choices for Canadians.
The real estate market for dwellings with apartments in the basement is about to take off. CMHC recently announced that, effective September 28, 2015, it will permit borrowers to use 100% of the rental income from legal suites to be taken into consideration as part of the mortgage qualification process. Current guidelines only allow 50% of the income to be considered. According to the CMHC, the purpose of this decision is to “facilitate affordable housing choices for Canadians.”
One benefit of a basement suite (or secondary suite elsewhere in the house) is to allow lower-income Canadians the opportunity to live in neighborhoods populated with single-family dwellings. Suites available in homes are often available at a lower cost than apartments of similar size that are located in multi-dwelling rental buildings.
This is a real boon for anyone who has been looking to purchase a home and bring in a lodger to help defray the overall cost. Many people who had been frozen out of the mortgage market because of the CMHC’s 50% rule will now be able to gain financing for a home and move toward the dream of home ownership.
At Amansad Financial, we believe that this is going to transform the real estate market by elevating the demand for financing. It is worth noting, of course, that CMHC has yet to provide exact clarification on what a “legal” secondary suite is. Based on the information that has been provided thus far, here is what we know about what you need to do to qualify for this financing.
First, you have to plan to occupy the house that you want to finance. Second, there can only be two units in the property. This means that you can use this provision to purchase a duplex or a single-family home that has a legal secondary suite or basement. If the suite is designated as “illegal/non-conforming,” you can’t use any of the rental income to help you qualify for the mortgage. If the suite is designated as “legal/non-conforming,” though, you can still use 100% of the rental income in your calculations. The term “nonconforming” refers to suites that were in use before the existing zoning and other regulations took effect, as these units benefit from a grandfather clause in this situation.
Some other requirements include the fact that the suite has to be self-contained, and it needs a separate entrance. One change that works against the borrower is that now lenders have to consider heating costs and property taxes when calculating the debt ratios for the borrower. This is not the case under the current rules.
If you are looking to buy a home with an existing secondary suite, you will have to provide a two-year history of rent income deriving from that suite. The most you can use in your calculations is a two-year average of the rent that the unit has brought in. If the unit is new, you are allowed to use a rent appraisal from the market if you apply the appropriate rate for vacancies to your estimates of the overall rental income. Finally, you have to have a credit score no lower than 680.
If you are looking to finance owner-occupied properties with three or four units, or non-owner occupied properties with between one and four units, CMHC will permit a net calculation of the rents (gross rent minus expenses for operating).
It is also worth pointing out that individual lender guidelines will use this guidance as a minimum in most cases, and there are some lenders who will have even tighter requirements that these. Some coverage providers, such as Canada Guaranty and Genworth, have already used a 100% ratio for basement suites, primarily in Vancouver and Victoria. However, the new policy of CMHC extends throughout all of Canada. The other two companies are looking at CMHC’s new policy and are considering whether or not they want to match this guideline.
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