Understanding the CMHC Mortgage Changes
The Canada Mortgage and Housing Corporation announced a tightening of its underwriting criteria on Thursday. In this article, we will cover what these changes will mean to you, the importance of credit when buying a home, how to boost your credit score, and other great tips on how to qualify for a mortgage.
Quick Summary of the changes:
- The country’s national housing agency said it was changing the credit rating needed to get mortgage insurance, up from from 600 points to 680 points.
- The Gross Debt Service Ratios will decrease to 35 (from 39%)
- Total Debt Service Ratio will decrease to 42 (from 44%)
- Loaned or financed funds will not be acceptable for down payments
CMHC explained that the changes would come into effect on July 1, 2020.
What does this mean for you?
- If you do not meet the criteria outlined above, you may not qualify for an insured mortgage with CMHC after July 1st. That being said, you may still qualify with the mortgage insurer Genworth – as they have indicated they will not follow CMHC in tightening mortgage insurance eligibility
- If you’re not sure if you fulfill the criteria, but would like to know, click here to find out the amount of mortgage you qualify for, estimate your mortgage payments, lock in an interest rate.
The Importance of a Credit Score When Buying a Home and how to build up your score quickly.
Banks aren’t going to lend hundreds of thousands of dollars to someone they’re not certain will pay the money back, so they look carefully at credit scores when making their decisions. Including data on how much debt you have, what type of debt you have, and whether or not you pay your bills on time, your credit score offers lenders a quick snapshot of how creditworthy you are.
Your credit score is your golden ticket for getting into the house of your dreams, and it pays to start thinking about your score long before you apply for your first mortgage.
Qualifying for a Mortgage
First off, the bank looks at your score to determine whether they want to loan you money or not. Those with low credit scores will not qualify for mortgages. Cutoff ranges vary from bank to bank, so if you’re turned down by one bank, you still stand a chance of getting a mortgage from another bank. However, you may need to spend a few years building up credit before you can get your mortgage.
Sometimes, your score is low, not because you’ve made a lot of mistakes, but because you don’t have a long history. This is particularly true for those who are new to Canada. We’ll talk more about this later, but it’s possible to build your score relatively quickly.
Determining Your Rate
Perhaps more importantly, the bank uses your credit score to determine the interest rate you pay on your mortgage. Only those with excellent credit will get the low scores that you see advertised. Those with good or average credit may pay one or two percentage points higher than the published rates.
What does this mean for you? It depends a lot on the type of home you’re buying, but the higher the interest rate, the higher the monthly payment. In many cases, the difference between rates offered to people with mediocre credit can mean a payment that’s $100 or more per month. Over time, this results in paying tens of thousands of dollars more in interest.
Most banks have credit ranges that they use to determine the rates. For instance, they might give those with credit scores higher than 800 the best rates; those with scores between 700 and 800 a slightly higher rate; and those with scores between 600 and 700 an even higher rate. Compare your score with the bank’s ranges. If you’re close to the score cutoff for a better rate, you may be able to get a better overall deal if you can boost your credit score by those extra points in just a few months. Alternatively, your score might qualify you for a better rate at a different bank if they use different credit ranges.
When Cash Isn’t King
One thing that confuses a lot of people about credit scores is that it isn’t always best to save up for large purchases. Those who always pay with cash can find that they have a low credit score simply because the credit bureaus don’t have enough information to make a determination of creditworthiness.
If this is why your score is low, you should apply for a new credit card, then use it sparingly, making sure to pay off the entire balance each month. In doing this, you’re showing that you can be responsible with credit without having to pay any money in interest charges.
Boosting Your Score
As you get ready to buy a home, you’ll want to make sure that your credit score is as high as possible. Even if you don’t technically need to improve the score, you need to work hard to make sure that it stays as high as it is.
Two of the most important things to boost your score are making on-time payments and paying down any debt you may have. These things account for more than 50 percent of the data that’s used to determine the score. The faster you’re able to pay down your debt, the bigger the increases you should see in your score. You should also refrain from closing any old accounts, as this can make it seem like you’ve had credit for less time than you really have and decrease your score.
Once your debt is paid down, it’s also very important to keep your credit utilization ratio under 30%. This simply means keeping the amount of debt you have relative to your limits under that amount. So for example, if you have a $1000 limit on your credit card, aim to keep your debt at less than $300. This not only applies to each credit card you own, but also to the combined limits of all your cards.
Your credit score is important when you buy a home, but it isn’t the only factor involved. You need to have the income to prove that you’ll be able to make payments. If you’re not sure where you stand, it’s time to talk to a lender about getting a mortgage pre-approval. You’ll then know what types of rates you can get and how much the bank is willing to lend you for your home.