Borrowing Guidelines for Insured Stated Income Programs in Canada are about to change
The borrowing guidelines for insured Stated Income Programs are about to undergo some major changes and these changes will be implemented effective April 9, 2010.
The changes are being announced by CMHC (also known as Canada Mortgage and Housing Corporation). CMHC’s changes, as well as those announced by Finance Minister Jim Flaherty effective on April 19, 2010 are all attempts to help cool off the heated housing market which is now being driven by record-low interest rates. More importantly, these new measures are required to protect borrowers from taking on more debt than they can afford especially as interest rate hikes are imminent. While Canada still allows Stated Income programs here, they are becoming very rare in the U.S. The massive number of defaults and foreclosures reported by the U.S. after the 2008 credit crisis were attributed mostly to Stated Income programs that were used to place under-qualified borrowers into mortgage loans that they could not afford.
While Canadian lenders continue to use the Stated Income programs here, customized for commissioned and self-employed borrowers, CMHC will now be scrutinizing those same applications using tighter underwriting criteria making the CMHC Self-Employed mortgage insurance program a little harder to access.
What exactly does Stated Income mean?
Stated Income means exactly that. When a mortgage application is created, for a self-employed or commissioned applicant, and the entire income amount is not verifiable in traditional documents, for example a Notice of Assessment, the applicant may apply under the Stated Income program to allow an income adjustment to help qualify them for a home purchase or re-finance.
Most important change is Tenure: those who have been working in the same business for greater than three years, would not be eligible for the Stated Income program and therefore those in this category would have to provide proof of their income, for example, a Notice of Assessment.
Vancouver Mortgage Broker Mark Fidgett explains High Ratio Mortgages
Banks and financial institutions are not allowed to lend against real estate mortgages unless the down payment is at least 20% of the value of the property. In order to achieve a higher level of financing, lenders need to obtain mortgage default insurance from one of three institutions in Canada – the Canadian Mortgage and Housing Corporation (CMHC), Genworth Financial (formerly GE Mortgage) and AIG United Guaranty. In the event the borrower is unable to pay the mortgage, the lender will be paid by these institutions.
AIG is not widely used due to the financial difficulties experienced by their parent company in the US.
It is the lender’s choice as to which mortgage insurance company to use. Many lenders have a preference as to which mortgage insurance company to use.
There may be cases where one mortgage insurance company is more suited to the transaction. For example, Genworth has a more flexible policies for rental suites. Genworth will accept non-conforming basement suites while CMHC will not.
The insurance premiums is computed based on the level of financing, as shown below
Loan to Value ratio
Premium
Up to 65.00%
0.50%
65.01 – 75.00%
0.65%
75.01 – 80.00%
1.00%
80.01 – 85.00%
1.75%
85.01 – 90.00%
2.00%
90.01 – 95.00%
2.75%
Note: premiums are for fixed rate or capped variable single advance mortgages. Please contact www.notapennydown.com for other types of mortgages..
The cost of mortgage default insurance is paid by the borrower and can be added on to the mortgage amount. Note that with high-ratio mortgages, CMHC, Genworth or AIG will do the appraisal so there is no appraisal fees in a high-ratio transaction.
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