What is CMHC or mortgage insurance when buying a house with low down payment?

By: Laddi Dhillon

What is CMHC or mortgage insurance when buying a house with low down payment?

Tags: In this article, you and I will learn about CMHC Insurance and what you need to know about it as a proud firsty in the real estate world. Also, you should look forward to some first-time homebuyer tips and even more.

 

Canada is a great country for first-time homebuyers. Here we have many opportunities for every girl and guy who wants to purchase a good house but experiences a shortage of money.

 

Sounds great and maybe a little familiar, yeah?

 

But, there are some things everybody, especially first-timers in the real estate world, needs to know before diving into the wonderful world of property.

 

In this article, you and I will learn about CMHC Insurance and what you need to know about it as a proud first in the real estate world. Also, you should look forward to some first-time homebuyer tips and even more. Let’s go!

What is CMHC Insurance?

Let’s start with the basics. You may know on this point (we hope) that you need to have a particular sum of money for a down payment for your future property. This sum is regulated by Canadian law, and the minimum down payment depends on the purchase price of the house.

 

For example, if you want to buy a house that costs less than $500,000, you need to save up no less than 5% of the purchase price for your down payment.

 

However, here we talk about the minimum down payment when buying a house in Ontario in particular! The recommended sum for a down payment for any house is always as much you can (of course!), and the minimum down payment is not ideal. 

 

And, if this sum less than 20% of the house’s purchase price, this is the situation where CMHC insurance enters the conversation.

 

And it is mandatory. For any down payment less than 20% of the purchase price, you need to add CMHC insurance (or mortgage default insurance) to your expenses

How much is CMHC Insurance?

Usually, you need to pay from 0.6% to 4.5% of the house’s purchase price for CMHC insurance. That’s why, if you know that you will not have 20% of the purchase price of your dream house, add CMHC insurance cost to your house’s closing cost in Brampton.

 

You will not need to pay the full cost of your CMHC insurance right away with the down payment. There is also an insurance premium on it, and your lender needs to pay it. However, the lender will pass it to you and add the premium to your monthly mortgage payments.

 

First-time homebuyer tip! The Canadian government has different programs that help first-time house buyers with their down payments. We advise you to learn about those programs on the governmental website here

 

Also, you can if similar programs exist in your specific neighbourhood or region. Region of Peel sometimes introduces the down payment assistance for qualified buyers. Who knows, maybe it will help you to buy your dream house a lot earlier than you thought!

Why do you need mortgage default insurance?

You may be wondering: buying a home is expensive enough. Why do I need to buy additional insurance? It is a good question indeed!

 

Well, CMHC is needed for lenders in the first place: if you stop making your mortgage payments, the lender will get compensation from your insurance that will cover his loss. When you are buying a house with a low down payment, it may occur in the future that your mortgage is just too much for you!

 

But, homeowners, house buyers and even property sellers benefit from this CMHC program too!

 

This program creates more affordable housing options for everybody. Even with the minimum payment, you can now afford a house and mortgage because lenders can be sure that they will not lose money when choosing you as a buyer.

 

Mortgage default insurance also helps keep real estate prices relatively low (or maybe it is better to say, lower than they could be) and makes buying a property possible for more people.

 

To sum up, CMHC mortgage loan insurance protects lenders and helps buyers get lower mortgage rates. A great deal, if you ask!

When do you need CMHC mortgage loan Insurance?

So, now let’s talk about specific circumstances when you need to get mortgage default insurance in addition to your down payment.

 

As we have told you previously, the first thing that makes you qualified for this kind of insurance is when your down payment is less than 20%. It also means that even if you have got only 19.99% of the house’s purchase price, you still need to get CMHC insurance.

 

But the cost of it will be much lower, of course.

 

Also, CMHC mortgage insurance can be applied only for mortgages, where the purchasing price of the home is under $1,000,000. For all houses that cost more than this sum (or they cost exactly $1,000,000), the minimum down payment would be 20% percent. And as we know, in this case, the insurance is not applied.

 

First-time homebuyers tip! There are several types of mortgages that you can get in Canada. They are applied to the different cases, and you can learn about them here.

 

Down payment is important, but it is not everything in this process. Even if you’ve got the needed sum for a down payment, check these mortgage plans and come up with the perfect one for you!

The requirements for mortgage default insurance

Although the Canadian government tries to help with home buying as many people as possible, there are few restrictions to the CMHC mortgage insurance program.

 

Not everyone can be qualified for it. That’s why, if you can’t get CMHC insurance, you will not be able to buy a house with less than a 20% down payment.

Mortgage amortization 

 

Mortgage amortization means that you plan to pay off your debt to a bank (aka mortgage) in a certain amount of years. If you pay it sooner, usually it will have consequences in the form of fees. The maximum amortization for your given house must be no more than 25 years if you need CMHC insurance.

 

But, if you want to get a 30-year mortgage, for example, you will not be able to get CMHC insurance. That’s why in this case, you need to save more for your down payment or get the shorter mortgage term!

Pay with your own money

This is one of the new rules that was created to properly respond to the current economic situation in Canada and the world in general.

 

It is simple: you need to get your own money for a down payment. I think that this rule was created to, first and foremost, ensure you as a buyer that you are in a safe place in life and you can afford the mortgage and new house. And if you are not, then you need to wait.

Your credit score and Debt Service ratios

Now they matter too. As for your credit score, from the 1st of July 2020, to be qualified for CMHC insurance, your score needs to be at least 680.

 

As for the Gross Debt Service ratio(also called GDS), you will be able to get the insurance if it is not less than 35 and the Total Debt Service ratio(TDS) of less than 42.

Where can you get this insurance?

This is a governmental program, and you can’t get CMHC insurance from anywhere. Today you can get this only from these three places:
 

The Canada Mortgage and Housing Corporation (CMHC)
Canada Guaranty
Genworth Financial

Conclusion

CMHC insurance is an important government program that helps many people to get their dream home. With this program, you can buy a house or a condo with a very small amount of money, which covers not more than 5% of the property’s purchasing price.

 

The insurance helps lenders to be protected even if you can’t pay your mortgage payments anymore. It helps to stabilize the real estate market and get more people into buying property.

 

It has some restrictions, but overall, with the CMHC insurance program, more and more Canadians will be able to get their own property, and that’s great!