Two More CMHC Rule Changes
On April 25th, the Canadian Mortgage and Housing Corporation (CMHC) announced two more rule changes affecting default insured mortgages (e.g., mortgages with less than 20% down payment or equity) on residential properties. These rule changes reflect quietly announced budget changes to taxpayer-backed mortgage insurance.
As of May 30th, 2014, CMHC will not offer:
1. Default insurance for second home mortgage financing. This will affect:
- second home owners
- co-signers of default insured mortgages
- vacation home buyers
- "moving-up" buyers who want to hold onto their current home as a rental property.
2. Default insurance on mortgage financing for the self-employed without third-party income validation. This will affect:
- "stated income" mortgage borrowers
- those who have difficulty proving their past two years' income via third party sources
- those who take advantage of 15% grossed-up income or add-backs to income qualify.
According to Steven Mennill, Senior VP of Insurance, CMHC is in line with their mandate of "contributing to the stability of the housing market and finance system" in Canada by evaluating and making changes to its products and services to reduce taxpayer risk exposure. These changes are expected to affect about 3% of CMHC's insured business volume in Canadian housing market units.
CMHC is a Crown corporation often used as a tool since 1946 to stimulate or temper the national housing market and economy. CMHC's stated intent in 2014 is to limit the amount of new guarantees and reduce its annual issuance of portfolio insurance from $11 billion to $9 billion. The Canadian Press cites that CMHC currently has about $560 billion in outstanding mortgage insurance on its books. The government has capped CMHC's maximum value of insured mortgages at $600 billion.
Who should pay attention to these changes?
1. Currently Applicants for Mortgage Default Insurance (re Second Home and/or Self-Employed)
For those who are financing second homes and/or self-employed, it's time to firm up that mortgage application if default insurance is required. Mortgage loan insurance applications with complete borrower and property details must be submitted before May 30th, 2014, in order for the current rules to apply. The closing date of the home purchase can still occur after the deadline.
2. Second Home Owners
CMHC's second home insurance product has been available since 2005 and it applies to an owner-occupied second home located anywhere in Canada. After May 30th, 2014, default mortgage insurance will only be available for one property (1-4 units) per brrower/co-borrower at any given time.
NOTE: This means a co-borrower, such as a parent, cannot co-sign for their children's default-insured home if the parents home is default-insured as well. And it means that, for example, a condo originally purchased by first-time homebuyers with default insurance cannot then be kept and rented out if they want to default insure the mortgage on their next "moving-up" home purchase.
3. Self Employed (Without Traditional 3rd Party Validation of Income)
Since 2007, Self Employed or Business for Self (BFS) were allowed under CMHC rules to access default insured financing for a 1-2 unit owner occupied property even if they were unable to provide traditional sources of income validation. In order to qualify for mortgage default insurance after May 30th, 2014, these folks will need to supply Notice of Assessments, audited financial statements or unaudited financial statements prepared by an independent third party, for the previous two year period.
NOTE: Since the Income Tax Filing Deadline for Year 2013 is fast approaching, now is a good time for BFS's to discuss options on how they are reporting income. From an accounting perspective, taking advantage of as many tax deductions as legally possible is the norm. By all means, BFS's should seek advice from their accountant or tax filter BUT ALSO REMEMBER to consult their mortgage broker.
As your mortgage broker, I can advise on reporting income needed - and its validation through traditional sources - in order to qualify for a default-insured mortgage on a principle residence. For BFS folks, that advice could make the difference between home ownership or renting the next time mortgage financing is needed!