Along with the premium rates we discussed last week, CMHC announced last month coverage changes to its mortgage insurance program. Effective at the end of this month, CMHC will no longer insure stated income mortgages or second home mortgages.
Stated income is basically when a broker accepts a applicant’s word at what his or her income is without asking for verification. This is particularly useful to the self-employed, who don’t receive paystubs. To offset their additional risk, these mortgages often came with higher fees, higher insurance premiums, or both.
Second homes are exactly what they sound like: more than one home that a homeowner claims to be living in. Currently, second home owners can access the same insurance offerings as any other home owner with just 5% down.
How does this affect stated income mortgages?
CMHC introduced their Self Employed Without Traditional 3rd Party Validation of Income program 7 years ago to respond to industry competition.
Despite what you may be hearing in the media, business owners will still be able to get a mortgage: they just have to prove their income using Notice of Assessment, audited financial statements, or unaudited financial statements prepared by an independent third party. In fact, they will still be able access the 10% down program as they can now, except they have to provide proof of income for the previous two years.
For some business owners, it may force them to choose between keeping their income low to avoid tax penalties or keeping their income high to qualify for better mortgage insurance coverage.
How does this affect second home mortgages?
The Second Home program is 9 years old, and allowed for insurance options if a homeowner wanted to purchase, say, a summer home or a home in the city for commuting. It was also a loophole for real estate investors to purchase a home, claim it was for a family member (without ever having to prove it), then rent it out to tenants.
The new changes will limit mortgage loan insurance to only one property (1–4 units) per borrower. Second home borrowers who want to have insurance will need to have at least 20% down, far more than the 5% that used to be required
What options are available?
If these programs are important to you, note that private insurers, Canada Guaranty and Genworth Canada have no plans to change their stated income programs. They will still have a second home program, but they have limited it to single family housing.
If you want to keep CMHC as your insurance provider, you have until 30 May 2014 to submit your mortgage insurance request. The closing date of the home sale can be after that date.
Contact us today for more information or to have us answer your questions.