New CMHC Guidelines Could Create More Accessible Financing for Self-Employed Borrowers

03 October 2018
Joshua Chisvin

So, in case you hadn't heard, some new guidelines from Canada Mortgage and Housing Corp. came into effect on October 1.

What do you need to know about them?

Well, for one, they could make it easier for self-employed borrowers to qualify for financing.

That's because the changes apply to borrowers putting down less than a 20% down payment and seeking CMHC’s high ratio default insurance, as well as, in some specific cases, where borrowers are putting down more than 20% but default insurance is required by the lender.

Make no mistake, the move falls right in line with the federal government’s Canadian Housing Strategy, which itself is a decade-long, $40-billion plan to assist more Canadians in accessing affordable housing.

Prior to the changes, it wasn't exactly easy for prospective borrowers to get a loan if they had been self-employed for less than 24 months. Heck, it was downright difficult.

The new enhancements, however, allow newly self-employed people to be considered through additional factors.

And what "additional factors" might those be?

Well, like whether they acquired an established business or if they have enough cash reserves or predictable earnings, as well as what kind of training and education they have.

Moreover, various income documentation can now be included to help further satisfy the necessary requirements.

Take Canada Revenue Agency’s notice of assessment and the Statement of Business or Professional Activities, for example.

Anyway, the official word from CMHC is they felt there was a definite need to address this particular demographic and to make sure they get a fair chance at qualifying for financing.

It's a sound line of reasoning, as far as I'm concerned.

According to the agency, some 15% of Canadians — spanning entrepreneurs and doctors to small-business owners and many others — are considered to be self-employed.

What's more, that percentage is projected to increase, owing to the growing quote-unquote gig economy.

Those in the self-employment and housing sectors have so far appeared welcome the changes.

And why not? It opens the door for self-employed individuals who have the means but were previously unable to qualify.

Many had grown used to experiencing a helluva lot more difficulty or push-back from the lenders, which made mortgage brokers not like to deal with self-employed people as much.

Well, the new guidelines should ease some of those challenges.

Phew.

On that note, we must remember that the new changes are only guidelines. Lenders and other CMHC partners have leeway to interpret and apply them at their own discretion.

In other words, they can choose to take them the way they are, choose to add their own enhancements to it or choose to add only a portion.

For their part, Toronto-Dominion Bank claimed that it reviews all potential borrowers on a case-by-case basis, and that it would be making changes to reflect some of CMHC’s new guidelines.

Some of these changes include looking at documents, such as the personal income tax T1 General Form, to help meet requirements.

Limited options for borrowing have, of course, long been a concern for self-employed individuals. In fact, they may have pushed people towards the shadow banking sector.

Specifically, alternative lenders tend to charge higher interest rates, which can boost costs considerably. A borrower in Toronto or Vancouver paying an extra percentage point could pay, say, $5,000 more in interest a year, and more than $125,000 extra over twenty-five years.

The CMHC enhancements follow new federal guidelines that went into action at the start of this year, which required major lenders to apply a stress test to potential borrowers.

Some Toronto real estate agents have experienced firsthand the double impact of being both self-employed and getting a mortgage under the tighter rules.

Simply put, they now find it refreshing the CMHC is finally recognizing that self-employed people play such a vital role in the Canadian economy.

SOURCE: The Globe and Mail

  Real Estate