Buying a home with less than 20% down payment? Heads up!
“If you’ve been thinking of buying a home with less than 20% down payment, I suggest you get a preapproved mortgage before July 1, 2020 or your short-term, home-buying dreams might go up in smoke.”
Welcome to my first blog post! Given our current lockdown, I thought it was a good opportunity for me to share some ideas and educational moments about real estate in writing, so you can read them at your leisure. This week, I want to address last Friday’s announcement about changes to mortgage insurance requirements.
On June 5, 2020, the Canadian Mortgage and Housing Corporation (CMHC)—one of only three mortgage insurers in Canada—said that as of July 1, 2020, anyone buying a home with less than 20% down will need to meet the following changes in qualifying criteria:
Credit scores must now be 680+. Previously, the minimum score was 600+. Note that 680 - 740 is considered a good to excellent credit score.
The maximum gross debt service (GDS) ratio has been lowered to 35% from 39%. GDS is the percentage of your monthly, gross household income that covers your basic housing costs, such as mortgage, property taxes, and utility bills.
The maximum Total Debt Services (TDS) ratio has been lowered to 42% from 45%. TDS is the percentage of your monthly, gross household income that goes to pay your basic housing costs plus other debt repayment such as credit card and loan payments.
What does this mean for you?
In short, to qualify for mortgage insurance, you need a good to excellent credit rating, and the most you should be paying towards your basic housing costs is 35% of your household income before taxes and only 42% of your income can be used for basic housing plus loan and credit cards payments.
By lowering the GDS, CMHC has dropped the amount of house you can buy. For example, if you could currently buy a house for up to $500,000, after July 1 you will only qualify for $480,000.
Also, by lowering the TDS, CMHC is saying they don’t want you to carry much more debt than your mortgage, taxes, and basic costs. Basically, you can only spend about 7% of your income on car, credit card, and other loan payments.
What should you do?
To manage your debt service ratio, don’t buy expensive cars on credit or take out any big loans. If you have student debt, make sure you’re paying it down. Otherwise, you’ll have to start paying 3% of your total loan, which will bring your eligible amount for a mortgage even lower.
If you want to buy within the next 120 days and don’t already have preapproval for a mortgage:
Get a preapproved mortgage within the next 3 weeks or by June 30th. (And don’t procrastinate until the last week 😉; contact your mortgage broker or bank ASAP!)
If you’re looking to buy in a 3 to 9 months:
Pay attention to your credit score. Pay the minimum payments for your credit cards and loans, and don’t walk away from any credit commitments like with your mobile phone.
If you’re thinking of buying a house within the next year:
Check your credit score and if it’s less than 680, talk to a mortgage broker or lender to help you repair your credit. I like using skipthebank.ca, because they’re awesome at teaching you how to repair and increase your score so you’re ready for a mortgage approval.
Your Buying Strategy
This is a great time to buy for first-time buyers who can be flexible in their living needs. Unfortunately, as the government continues to put more restrictions on financing, your buying power is being eroded. Therefore, if you’ve been dreaming of saving up enough to buy a detached home, I suggest you buy what you can afford now and get your foot in the real estate market. Buy smart so that you can save while still paying a mortgage and increasing value on your starter home. In a couple of years, you could be in an excellent position to trade up to something more to your liking and lifestyle.
CMHC is more uncomfortable with risk than before in insuring mortgages but that you just need to adapt your home-buying strategy. Your first home may not be the dream home you were hoping for but by getting your foot into the market, you are closer to that dream home. Call me and I’d be happy to guide you through the home buying journey!