CMHC’s new/old underwriting criteria

Risk measure
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Insurance is a big piece of the mortgage puzzle in Canada. If you can’t come up with a 20% down payment, you’re required to purchase insurance against the possibility of defaulting on your mortgage.

And mortgage insurance isn’t automatic. Insurers need to sign off on a mortgage application for it to cross the finish line. That’s why they have their own underwriting criteria.

Prior to July 1, 2020, CMHC and its two non-government competitors had similar underwriting standards, including:

  • A minimum credit score of 600 for at least one borrower requesting insurance
  • A gross debt servicing (GDS) ratio of 39%
  • A total debt service (TDS) ratio of 44%

GDS refers to the proportion of housing debt borrowers pay compared to their income. TDS is the proportion of gross income that is already allocated to housing-related and other kinds of debt.

After July 1, 2020, CMHC’s new guidelines were adjusted as follows:

  • A minimum credit score of 680
  • A GDS of 35%
  • A TDS of 42%

With Canada Guaranty and Sagen standing pat with their own underwriting criteria, CMHC’s stricter guidelines sent a wave of new business to the private mortgage insurance space. In the first quarter of 2021, Sagen’s net income was up 41% year-over-year.

Sensing how much market share it was losing, CMHC had little choice but to return to its previous underwriting standards.

“We are taking this action because our July 2020 underwriting changes were not as effective as we had anticipated,” CMHC said. “A healthy market share is an important consideration as it helps us fulfill the financial stability aspect of our mandate.”

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Will CMHC's new guidelines help you buy a home?

Likely and unlikely
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There is really only one way CMHC’s recent tweaks might help you get into a home if you couldn’t before, and it’ll require a very unlikely scenario.

You’ll have to have aligned yourself with a mortgage broker who has severely limited relationships with lenders — so limited that these lenders only work with CMHC on mortgage-insurance matters. It’s hard to imagine a lender staying in business for long with such a limited business model.

Still, if you're actually in this situation, and being denied CMHC mortgage insurance for the last 12 months has been the only thing preventing you from getting your mortgage approved, then buying a home did just get easier for you.

Realistically, though, lenders who couldn’t get CMHC to insure their deals in the last year simply sent them off to Sagen and Canada Guaranty.

Based on the record number of homes sold in 2020 — and in the first half of 2021 — one insurer changing its underwriting guidelines appears to have little effect on Canadians’ access to, or demand for, mortgages.

Expect a similar result this time.

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Clayton Jarvis is a mortgage reporter at Money.ca. Prior to joining the Money.ca team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.

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