By Alim Charania
Five years ago, the mortgage industry began to radically change in ways many today aren’t even aware of.
These changes need to be brought to the attention of homebuyers as new rules and regulations are making it more difficult to complete mortgage financing. The CMHC (Canada Mortgage and Housing Corporation) has established new rules that are affecting gifted payments, stated income for the self-employed, purchasing a second home and the documentation requirements.
Many first-time home buyers receive cash gifts to put towards a home from family members or friends.
In the past, a simple letter proving the gifted deposit to your account was all that was needed to apply the cash gift against your new home. After the CMHC’s new rules were instigated, homebuyers now need to prove cash gifts via a 90-day bank account history and in some cases a verification from the third-party donor is requested.
This change in documentation requirements has also affected self-employed individuals.
As of May 30th, CMHC has said the 10% down-payment option for self-employed persons will be removed. This change affects second home purchases as well. Before this announcement, second homes could be purchased with a 5% down-payment, but due to high risk this allowance has been removed.
This also means that if you already purchased a home with a 5% down payment with CMHC and intend to rent it and move into another home, the 5% down payment will not be available. If you would like to hold more than one insured property you can still use the stated income program through Canadian Guaranty and Genworth Financial.
In order to prepare yourself for a mortgage, preparing a few key items will ensure your success. First, save for your own down payment and aim for at least 50% if you plan on receiving a cash gift.
These funds should be stored in only a couple accounts so that money isn’t being transferred to and from different places frequently. You should also make sure your credit rating for the past two years is in good standing with no late payments. The goal with finances is to prove your stability to the lender.
This stability is also reflected through employment. Before applying for a mortgage, a minimum of three months at your job is required. In order to guarantee your approval, longer than three months is preferred, as well as being in your industry for more than two years.
Though these changes have been made and more are to come, it’s not all bad news. The purpose of all this change is to minimize lost funds for lenders from pre-approved candidates choosing a different lending organization.
This helps mortgage institutions ensure awareness in their mortgagees, and in turn benefits homebuyers.
Too many consumers in the current market react impulsively, resulting in ill-prepared commitments being made prematurely. By instigating the new regulations, less exceptions can be made in an attempt to increase vigilance. The key is to go into the mortgage process having done your research and have the necessary documentation prepared.
As long as you do your due diligence, the process will not be difficult and you will end up with a mortgage that is appropriate for you.
Alim Charania is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group Red Deer.