February 6th - 2009

Your knowledge of CMHC insurance products may help close the deal

The current economic situation has many potential homebuyers worried and confused about their prospects for buying a home. For many buyers – especially first time buyers – mortgage insurance is an option that may help them buy their own home sooner.

The current economic situation has many potential homebuyers worried and confused about their prospects for buying a home. For many buyers – especially first time buyers – mortgage insurance is an option that may help them buy their own home sooner.

Last fall, the federal government eliminated some financing options products including the 40-year amortization period and the no-money down mortgage. Both of these incentives were previously insured by Canada Mortgage and Housing Corporation (CMHC) as well as other insurance providers. Although CMHC no longer insures mortgages with amortizations over 35 years, they have several other mortgage insurance options available.

Mortgage insurance 101

It’s important to know the ins and outs of mortgage loan insurance to enable you to advise your clients. According to information on CMHC’s Web site, mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with as little as 5% down payment — with interest rates comparable to those with a 20% down payment.

To obtain mortgage loan insurance, lenders pay an insurance premium, which is passed on to the homeowner. The premium payable is based on a percentage of the home’s purchase price that is financed by a mortgage. The premium can be paid in a single lump sum or it can be added to the mortgage and included in the homeowner’s monthly payments. Mortgage loan insurance is not to be confused with mortgage life insurance which guarantees that the remaining mortgage will be paid upon the death of the insured.

CMHC offers mortgage loan insurance on various property types including duplexes, condominiums, owner-occupied properties, manufactured or mobile homes, properties requiring renovations and even rental and nursing homes

Down payment options

REALTORS® know that the hardest part of buying a home – especially a first home – is saving the necessary down payment. For those home buyers who have saved up a down payment, traditional mortgage loan insurance require home buyers to provide the minimum down payment from their own resources, however gift down payments from immediate relatives are also acceptable.

However, additional sources of down payment are also available through CMHC’s Flex Down product. With Flex Down, homebuyers with a proven track record in managing their debt can provide the 5% down payment from a variety of sources, including borrowed funds or lender incentives, provided the funds are at arm's length from and not tied to the purchase or sale of the property.

Self-employed simplified

In recognition of the growing proportion of self-employed people in today’s workforce, CMHC recently added a new initiative called Self-Employed Simplified. CMHC has developed tools that help assess the risk associated with borrowers who have difficulty obtaining third-party validation of their income using traditional forms of documentation.

This new offering will help self-employed borrowers and commissioned salespersons to obtain a CMHC-insured mortgage, much like borrowers who receive a salary or hourly wage from an employer.

CMHC Self-Employed Simplified is designed for borrowers who have a minimum of two years in the same type of work and a proven track of responsibly managing their debt. The product will insure mortgages on one- or two-unit homeowner properties and will also be available for refinance transactions, for mortgages up to 90 per cent of a home’s value.

What your buyers need to qualify income

According to CMHC’s Step-by-Step Homebuyers guide, if your buyers are employed by others they’ll need confirmation of salary in the form of a letter from their employer along with other sources of income. They also need to indicate the source and amount of their down payment and deposit along with proof of source of funds for the closing costs (these are usually between 1.5% and 4% of the purchase price).

If your buyers are self-employed they must provide their Notice of Assessment, or financial statements either audited or prepared by a practising accountant. The borrower’s income is determined by averaging the income of the previous two year period or using the most recent year if income has increased year over year for four years or more.

Other potential sources of income may include rent payments, investment income, tips, spousal support, social assistance or employment insurance.

To learn more about CMHC mortgage financing, visit their website at www.cmhc.ca. Learn more about the CMHC mortgage financing classroom course.

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Senior Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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