New CMHC Rules for Stated Income Self Employed Borrowers

CMHC’s new rules for “stated income” self-employed borrowers go into effect today. As a reminder, here are the new rules:

Please Note – these new rules only apply if you can’t prove your income using the traditional methods

Maximum Loan-To-Value (LTV):

  • Purchase Transactions 90% (down from 95% LTV)
  • Refinance Transactions 85% (down from 90% LTV)

Essentially this means that, in order to qualify under the CMHC “Business for Self” program you’ll need to put a minimum of 10% down if you’re buying a home, and if you’re refinancing you’ll only be able to access up to 85% of the value of your home. CMHC insurance premiums will still be tacked on to the loan in most cases.

Eligibility Criteria Changes:

  • Self Employed borrowers must be able to substantiate that they have experience working in the same field for a minimum of 2 years. This can include time spent working as a non self-employed worker in the same field.
  • Maximum of 3 years self employed – Applicants that have been self employed for greater than 3 years are not eligible under this policy and must be approved following the standard total debt services (TDS) ratio and income confirmation guidelines.
  • Applicants who earn commission are no longer eligible under this policy and will now be approved following the standard TDS and income confirmation guidelines.

Analysis

The biggest change here is the rule that states you have to use verifiable income if you’ve been self-employed for 3 years or more. Essentially what CMHC is doing here is forcing self-employed people to declare higher incomes – much to their accountant’s dismay – in order to qualify for financing. I believe that this will be a challenging adjustment for accountants and the self-employed over the next couple of years because people who otherwise would have qualified – in some cases very easily – will no longer qualify for as much or at all!

Distinctions between CMHC and private insurers

It’s important to note that CMHC is not the only mortgage insurer in Canada. Both Genworth Financial and AIG offer private mortgage insurance to lenders and consumers in Canada at competitive rates.

Both Genworth and AIG will require self-employed borrowers to be self-employed for a minimum of two years prior to qualifying for their stated programs, but unlike CMHC, will not require a self-employed borrower to use verifiable income if they’ve been self-employed longer than three years.

Confused Yet?

As always, if you are self-employed and you have any questions about this you need to contact a mortgage professional as soon as possible to get a good plan in place. Don’t end up homeless!