New CMHC Policies That Could Effect You
By Leah Coss
Well, today, April 9th 2010, starts a new era of mortgage insurance policies from CMHC (Canadian Mortgage Housing Corporation). Upon the government’s review of our economic situation they decided to make some new government mandated changes that will be officially starting as of April 19th, 2010.
CMHC, however, has created additional new internal policies (not government mandated) that will effect who can and cannot get approved for their mortgage insurance. If you put down less than 20% down payment then you will have to also be approved by a mortgage insurer in addition to your mortgage lender. If you can’t get approved by the insurers, then you can’t get approved.
Keep in mind, CMHC is only 1 of 3 mortgage insurers out there. These changes ONLY apply to CMHC’s policies
The changes will apply to people who are:
1. Self employed or 100% commissioned
2. Own rental or investment properties
So what are these new changes that we will have to work around in addition to the already restricting Government changes?
Let’s start with the changes to people who are self employed or 100% commission. There was a program where you could just state your income and not have to declare it or “prove” it on paper. This was really only applicable to self employed or commissioned sales people because it is often difficult for them to document their income according to traditional bank guidelines. This is due to tax write offs with self employed borrowers. With the stated income program you could also just put 5% down for a down payment.
Those days are now gone with CMHC. You can now ONLY state your income if your business is LESS than 3 years old. If your business is older than that then you will have to document your dollars and prove your income just like all other borrowers.
The second change is that for those of you who do fall within the stated income guidelines of less than 3 years in the business, you will now have to put 10% down and not just 5%.
With respect to the changes to people looking to buy an investment property, or who already own investment properties, or have basement suites, these next changes may hurt you a little as the changes are drastic.
One part of the government mandated changes starting April 19th is that to purchase an investment or rental property you will now have to put 20% down, not just 5%. This is law.
What CMHC has done is take it a little further to ensure that no one gets in over their head when they purchase a home where they are depending on that rental income every month. For many, if your rental suite is empty for more than a couple months you may find yourself unable to make your large mortgage payments and eventually lose your home.
Without getting overly complicated for you, basically what they have done is change the math so that you will qualify for a smaller dollar amount. When we as a Mortgage Broker pre approve you for a dollar amount to buy a rental home, we take into consideration the fact that you will probably use the rental income to pay for your mortgage. The problem is they need to account for the months that will occur when your suite goes unrented as well as other expenses that come from having renters.
Previously we could take 80% of your rental income and use it to off set your other costs which was very beneficial for you. Now, we can only take 50% of the income and then only 44% of that to add to your income.
In simpler terms you are going from an 80% offset to a 22% offset. A Significant Difference! For the actual calculations on how this is done you can read about it here.
Lastly, with the old rules, a declaration from an appraiser of the amount of rent you can potentially collect for your suite you could simply submit that to your lender and nothing else needed to be done. As of now, if it is a new purchase than this is still the case.
When refinancing, however, with the new CMHC changes you will now have to show tax returns proving you have paid taxes and declared the rental income as income to the government. It will be the profit and loss that is shown on your tax return that will be used to qualify you.
This will also be the case if you are perhaps buying a new home for yourself and have a rental property in your portfolio already. You will only be able to use the income declared on your tax forms to help qualify you for a new home.
If you want more information on the CMHC changes and how they will effect you, call Leah at 604.313.9996 or email her at coss.l@mortgagecentre.com
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