CMHC’s New Underwriting Criteria: What Changed and What it Means for Home Buyers

The Canadian Mortgage and Housing Corporation (CMHC) has implemented new underwriting criteria (eligibility requirements) to apply for homeowner transactional and portfolio mortgage insurance. Introduced earlier this summer, these new adjustments from CMHC come as a precaution while the COVID-19 pandemic continues to impact consumers in the real estate market and many other aspects of day-to-day life.

The following changes have been made:

• The maximum Gross Debt Service (GDS) ratio is now 35% with no exceptions (previously, 39% GDS ratios could be approved under special circumstances).
• The maximum Total Debt Service (TDS) ratio is now 42% with no exceptions (previously, 44% TDS ratios could be approved under special circumstances).
• The minimum credit score required for at least one borrower is now 680 (previously 600).
• Non-traditional sources for down payments that increase indebtedness will no longer be treated as equity for insurance purposes.

However, not all Canadian mortgage insurers have followed suit. Canada’s other two mortgage insurers, Genworth Canada and Canada Guaranty, announced earlier this summer they would not be following CMHC’s lead.

In a statement at the time, Genworth confirmed, “it has no plans to change its underwriting policy related to debt service ratio limits, minimum credit score and down payment requirements.”

Canada Guaranty echoed this sentiment saying it “confirms that no changes to underwriting policy are contemplated as a result of recent industry announcements.”

How is mortgage insurance affected?

Mortgage insurance protects lenders in the event homeowners default on their mortgage. Home buyers purchasing a home with a down payment of less than 20% must have mortgage insurance. The following underwriting criteria are the main figures taken into consideration for mortgage insurance applications:

• GDS ratio: GDS ratio is the percentage of a buyer’s gross monthly income used for mortgage payments, taxes and heating costs and—if they are buying a condo—half of the monthly maintenance fees. 
• TDS ratio: TDS ratio is the percentage of gross monthly income required to cover monthly housing costs, plus all of a buyer’s other debt payments, such as car loans or leases, credit card payments, and lines of credit payments. A TDS calculator is available here.
• Credit score: A credit score ranges from 300 to 900 and is determined from a person’s credit report. A higher number means a person’s credit is managed responsibly. Various factors are taken into consideration to calculate credit scores. TransUnion and Equifax are Canada’s two main credit bureaus. You may also find your credit score through a private provider or your financial institution.

How does this all affect me?

While CMHC has made these slightly stricter underwriting restrictions as a precaution for the economic impact COVID-19 has had on the housing market, current trends are showing a promising rebound. Canadian home sales and prices have trended upwards through May, June and July following an initial decline in March and April, although on a year-to-date basis we remain below 2019 figures.

The Canadian housing market will see the financial and economic impact of COVID-19 unfold for months to come, and each province and territory’s recovery plan varies.