15 Jun

Everything You Need to Know about Mortgage Default Insurance

First Time Home Buyer

Posted by: Kelly Hudson

Home buyers say the #1 obstacle to home ownership is saving enough for a down payment.

When you buy a home, your best option is a 20% or higher down payment. For many Canadians, a 20% down payment is not affordable.

What can you do if you don’t have the cash for such a big down payment? You can apply for mortgage default insurance.

How much money do you need for a down payment?  

The minimum amount you’ll need for your down payment based on the purchase price of your home
Purchase price of your home      Minimum amount of down payment
$500,000 or less
  • 5% of the purchase price
$500,000 to $999,999
  • 5% of the first $500,000 of the purchase price
  • 10% for the portion of the purchase price above $500,000
$1 million or more
  • 20% of the purchase price

In Canada, mortgage insurance is required federally on high-ratio mortgages (a down payment of less than 20%). This insurance, which protects the bank/lender in case the borrower defaults, gives lenders the flexibility to offer home buyers with low down payments the same low interest rates they would offer to home buyers with bigger down payments.

In Canada there are only three Canadian mortgage default insurance providers: Canadian Mortgage & Housing Corp. (CMHC), Genworth and Canada Guaranty They all have the same sliding scale, the larger your down payment the less insurance you pay.

CMHC is a federal Crown corporation, while both Genworth and Canada Guaranty are private insurers.

As a borrower, your lender selects the mortgage insurer, not you. Each mortgage insurer has their own criteria for evaluating the borrower and the property, and they decide whether or not your mortgage can be insured. Therefore, it’s possible that your lender may approve your mortgage application, but the mortgage insurer won’t. In that case, you won’t be able to get a mortgage unless your lender decides to try another insurer. Since there are only 3 insurers in Canada – 3 strikes and you’re out!  

How Mortgage Default Insurance works:

Mortgage insurance premiums are based on the amount of the mortgage. The smaller your down payment, the more expensive the mortgage default insurance. The premium is generally rolled into the mortgage but can be paid upfront as part of the closing costs.

  • If the insurance premium is added to the mortgage amount, then you pay interest on the total amount borrowed, including the mortgage default insurance premium.
Down Payment Premium on Total Loan
15% – 19.99% 2.80%
10% – 14.99% 3.10%
5% – 9.99% 4.00%

If you stop making payments, the mortgage default insurer would protect your lender from financial losses. If you have mortgage insurance for the property, the lender can make a claim against the policy and the mortgage insurer will pay the lender.  However you are still responsible for repaying any balance remaining to the insurer.

In other words, if the sale of the property isn’t enough to cover the balance of the mortgage owing to the lender, you don’t get off scot-free, your lender or insurer are able to come after you personally for the remainder of the balance.

Mortgage Default Insurance Exceptions:

  • Investment properties are not eligible for mortgage insurance; consequently, you will need a minimum 20% down payment to buy.
  • The longest amortization period for an insured mortgage is 25 years.
  • Homes over $1 million are not eligible.
  • Even if you have more than a 20% down payment, there are some situations when your lender may require you to get mortgage insurance (depending on the location, type of property, etc.).

Why is mortgage default insurance necessary?

Mortgage default insurance offers a benefit to the home buyer. Without mortgage default insurance, lenders would charge much higher interest rates, since you are higher risk than someone with more than 20% down payment. Even though you pay mortgage default insurance, you benefit from paying less interest on the total mortgage amount.

When you buy a home, your best results will come when have a minimum 20% down payment, check out my BLOG 5 GREAT Reasons To Provide a 20% Down Payment when Buying a Home

If you can’t save a 20% down payment, then mortgage default insurance could allow you to buy your home.

Would you like more information regarding mortgage default insurance?

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

18 Jan

5 C’s of Credit to get a Mortgage

First Time Home Buyer

Posted by: Kelly Hudson

Whether you are buying your first home or have been a home owner for years, when you are looking at purchasing a property, finding the best mortgage solution for your specific situation can be an intimidating experience.

Working with a licenced mortgage broker will ease that tension, along with knowing the basics of what lenders are looking for will help you better understand the process.

 The Five C’s of Credit/Mortgages

The five Cs of credit is a system used by lenders to gauge the creditworthiness of potential borrowers. The system weighs five characteristics of the borrower and conditions of the mortgage, attempting to estimate the chance of default and, consequently, the risk of a financial loss for the lender.

Higher Risk = Higher Rates!

Know Your 5 C’s:

Every client has individual mortgage needs when buying a home and my goal is to find a mortgage loan that’s right fit for your situation! The first step in getting the mortgage process started involves understanding what lenders are looking for in order to get mortgage approval.

The approval process is called the Five C’s of Credit and they consist of:

  • Collateral– the property that you are planning to purchase
  • Credit – do you have good credit? Do you have a good history of repayment for all loans?
  • Capacity – Proof of being able to pay for your mortgage with your provable income
  • Capital – How much equity do you have in the property? The borrower’s net worth.
  • Character – The borrower’s willingness to repay the loan and their reliability
  1. Collateral 

    Collateral reflects the strength of the property itself.  Lenders look at if the property is owner occupied (do you live there) or is it a rental dwelling?  Is the property a home, condominium or cottage? Is the property located in a metropolitan neighbourhood or a rural area? Is there a single family living in the home or multiple families? All these factors are taken into consideration by the lender for marketability when rating your property. An appraisal is one of the tools used to assess the “current” value of the property.

BC Property Assessment vs Home Appraisal  

  1. Credit 

    Shows the lender a snapshot of what the borrower’s repayment history has been over a period of time. This is the only way a lender can predict the borrower’s propensity to make future payments. The credit score (also called credit history, credit report, credit rating) is the primary measurement factor.  When you borrow money, your repayment history is reported to the credit bureau – this rating is called your credit score.  How do you pay your bills – always on time or sometimes a few days late or not at all, will determine what type of credit rating will apply.  Some other factors that affect your credit rating are if your credit card balance is greater than 25-50% of your credit limit, if any accounts have gone to collection, or if there have been multiple inquiries into your credit.

Solving the Puzzle – 5 factors used in determining your Credit Score

8 Credit Rules You Need to Know, Before You Buy a Home

9½ Steps to Repair & Improve Your Credit

  1. Capacity 

    The most important by far! How are you going to pay for your mortgage? The lender’s main concern is how you intend to repay your mortgage and will consider your income (from all sources) against your monthly expenses.   Proof of income will differ depending on your employment status: salaried, commissioned, self-employed, full time, or part time.  Lenders will determine what types of documents are required to confirm your provable income and how much mortgage you can qualify for. This is represented as TDS Total Debt Service Ratio and GDS Gross Debt Service Ratio.

3 “Rules of Lending” what Banks look at when you apply for a Mortgage in Canada

  1. Capital 

    Capital refers to your personal net worth and how much equity you have in the property.  Where is your down payment coming from? In Canada your minimum down payment is 5% for a “high ratio” insured mortgage* or a “conventional” mortgage with 20% down. The down payment money can come from your own resources or can be gifted from a family member.

* Everything You Wanted to Know about Mortgage Default Insurance

  1. Character 

    Character is a subjective rating and basically reflects a combination of above 4 factors. Your character tells a story to the lender about your individual situation.  Lenders want to know that as a borrower, that you are trustworthy and will meet your payment obligations to them. Lenders will take factors such as length of employment, your tendency to save and use credit responsibly to establish your character and determine whether you are a borrower that they can trust with their mortgage.

The goal is to get a yes with your lender. The Five C’s of credit outlined above determine a borrower’s ability and willingness to make payments. Understanding what a lender is looking for allows you to set yourself up to put your best foot forward.

There you have it – the 5 C’s that lenders analyze when reviewing a mortgage application. 

If you have any questions or concerns feel free to contact me anytime, I’m here to help!

Mortgages are complicated… BUT they don’t have to be!  Engage an expert.

Give me a call and let’s discuss a mortgage that works for you (not the bank)! 

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile: 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com