HomeBlogCMHC Changes Underwriting Practices on Mortgage Loan Insurance

CMHC Changes Underwriting Practices on Mortgage Loan Insurance

CMHC Changes Underwriting Practices on Mortgage Loan Insurance

In the beginning of July 2021, The Canadian Mortgage and Housing Corporation (CMHC) announced that the changes that were made a year earlier would be reversed to the original numbers.

In an attempt to tighten insurance criteria for those that could not put down 20% on a given mortgage, CMHC took the initiative to clamp down on the overall percentage of debt allowance when determining the amount, a borrower could put towards housing costs and still handle any outstanding household debts.

Although the measures were put into place due to an overheated housing market and the looming threat of borrowers/homeowners falling over their depths when it comes to covering all housing costs, the change in debt ratio numbers did not have the desired effect.

Indeed, the Ontario housing market has been and continues to be in overdrive throughout 2020 and into the second quarter of 2021. While many homeowners may have feared the worst as the Covid-19 pandemic took grip, property owners throughout Ontario did not see their values plummet. 

The CMHC are very cognizant of these housing numbers and wanted to put a brake on the potential for some mortgages falling into arrears as homebuyers are taking on more and more housing debt.

Many real estate and mortgage professionals had predicted up to an 18% drop in property values as the pandemic became a reality and adversely affected other economic sectors such as the service and retail sectors. Fortunately, this forecast for the Ontario housing sector did not play out.

According to the Ontario Real Estate Association (OREA), housing appreciation in the GTA went up as much as 31% throughout 2020 and into 2021. Coupled with steep appreciation in property values, the number of housing sales skyrocketed as well.

With many homeowners reluctant to put their homes on the market, housing inventory continues to be in short supply. Buyers are continuing to outstrip the number of houses listed. As a result, bidding wars have become the norm. 

With such a hot housing market it is not unprecedented for the Government to want to step in and try to enact some cooling measures to help reduce the risk of a housing bubble. 

In July 2020 Government measures were taken to tighten some of the underwriting rules. This was a deliberate step to try to help reduce the number of insured mortgages taken out by home buyers who potentially might not be able to handle all housing costs in addition to monthly mortgage payments. 

Although in theory, any Government initiative to help avoid homebuyers facing difficulty with housing costs is a positive step, the Canadian Mortgage and Housing Corporation (CMHC) has reversed some of its July 2020 changes to underwriting policies related to insured mortgages.

What Changes to Underwriting Rules Did CMHC Implement in July 2020?

If a homebuyer is not able to put at least a 20% down payment when purchasing a home, the Government regulated CMHC will need to insure mortgages. For mortgages between 5% to 19% down payments CMHC will need to provide insurance for these mortgages. Mortgage payments will include mortgage insurance rolled into the monthly mortgage payment obligations.

In order to insure mortgages, an underwriter must assess certain criteria in order to mitigate risk for the insurer. An underwriter is taking on the responsibility of the mortgage if it is unable to be paid reliably and will assess different criteria such as a borrower’s credit score, debt ratio, and ability to cover all housing-related costs.

The areas in which CMHC base underwriting criteria were changed included:

  • Changes to Gross Debt Service Ratio- This represents the maximum amount of gross annual income that can be used for home costs including heat, hydro, and monthly mortgage payment. The percentage was lowered to 42%
  • Changes to Total Debt Service Ratio- This refers to the total number of liabilities that a homeowner is able to handle. Housing costs are calculated in addition to factoring in other household debts including for example car payments or credit card debt payments The percentage was lowered to 35% 
  • Changes to Minimum Credit Score Required- In order to qualify for an insured mortgage the credit score was raised to 680 

Why Were These Measures Implemented?

It essentially boils down to mitigating risk in the underwriting process. These measures were specifically implemented with the health of the housing sector and the homeowner in mind. They were designed to:

  • Protect the homeowner from potential mortgage default
  • Protect the housing market from becoming too overinflated which in turn could result in a potential housing crash
  • Protect the Government from a housing bubble
  • Protect the housing sector from an overinflated housing market due to restricted inventory and high housing demand during the Covid-19 pandemic.

What Do the numbers look like now in July 2021?

Despite the intention to avoid the potential for insured mortgages falling into arrears, the CMHC announced in July 2021 that the numbers implemented for underwriting criteria would be reversed to the levels that were in place previously.

  • The Credit Score was lowered- In order to qualify for an insured mortgage a borrower now is required to have a credit score of 600
  • The Gross Debt Service Ratio was raised- The number that is now permitted has been raised to 39%
  • The Total Debt Service Ratio was raised- The number that is now permitted has been raised to 44%

Why did CMHC reverse course? The reason for a reverse in criteria direction also boils down to the age-old how things may work in theory and how they work when put in practice. Once implemented and tested, the results did not work in the favor of the underwriting practices of the CMHC. 

According to the CMHC, the underwriting changes were not as effective as they had predicted. The CMHC also faced competition from other underwriters which is not ultimately good for business.

Although a borrower must still demonstrate reliability in paying debt obligations, the numbers will allow increased purchasing power for a potential homeowner moving forward.

Mortgage Broker Store Can Help Direct A Homeowner To Private Lending Options

If credit is an issue and an Ontario homeowner is looking at the option of private mortgage financing, the Mortgage Broker Store is in the position to negotiate private mortgage financing directly.

With an affiliated network of well-established private lenders throughout the Province, we will also be able to direct you to a suitable private lender who will be able to negotiate private mortgage financing spending on your unique financial picture. 

About Jonathan Alphonso

Mortgage Agent, Web Developer, and Real Estate Investor. Together with Ronald Alphonso I run MortgageBrokerStore.com. I write about a variety of topics on Canadian mortgages and real estate. Our particular specialty is dealing with Ontario power of sale and foreclosure situations.

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