The borrowing guidelines for insured Stated
Income Programs are about to undergo some major changes and these changes will
be implemented effective April 9, 2010.
The changes are being announced by CMHC (also
known as Canada Mortgage and Housing Corporation). CMHC’s changes, as well as those announced
by Finance Minister Jim Flaherty effective on April 19, 2010 are all attempts
to help cool off the heated housing market which is now being driven by
record-low interest rates. More importantly, these new measures are required
to protect borrowers from taking on more debt than they can afford especially
as interest rate hikes are imminent.
While Canada still allows Stated Income programs here, they are becoming
very rare in the U.S. The massive number
of defaults and foreclosures reported by the U.S. after the 2008 credit crisis
were attributed mostly to Stated Income programs that were used to place under-qualified
borrowers into mortgage loans that they could not afford.
While Canadian lenders continue to use the Stated
Income programs here, customized for commissioned and self-employed borrowers, CMHC
will now be scrutinizing those same applications using tighter underwriting
criteria making the CMHC Self-Employed mortgage insurance program a little
harder to access.
What exactly does Stated Income mean?
Stated Income means exactly that. When a mortgage application is created, for
a self-employed or commissioned applicant, and the entire income amount is not
verifiable in traditional documents, for example a Notice of Assessment, the
applicant may apply under the Stated Income program to allow an income
adjustment to help qualify them for a home purchase or re-finance. A real example might look something like
this:
Mr.Thomas works as a Systems Analyst in
Toronto. He is purchasing a house based
on his earnings alone as his wife is currently not working. He earns $77,000 gross annually and his
employment status is considered self-employed as he works as an independent
contractor and bills the company directly for his time. He is not on payroll. He has worked in various departments for this
same government organization, as a Systems Analyst, for the last two
years. To buy the home they want, this
couple would need an income of $85,000 to qualify for the purchase. On a traditional mortgage application, the
couple would be declined and would not be able to purchase the home. However, by utilizing the Stated Income
program, the couple can qualify to buy this home with a 5% down payment and the
income placed on the application would be “stated” on the application at a
higher amount. The couple has no other
savings or funds available to them. The
income to qualify the applicants, would be entered at the amount of $85,000
instead of his actual income of $77,000, in order to qualify the buyers.
Here is an outline of the changes that will
be implemented on any applications called Stated Income applications which pass
through CMHC as an “insured” mortgage AFTER April 9, 2010 and how these changes
would affect the particular applicants described above:
1. Downpayment: those who are purchasing a home, and who have
applications classified as a Stated Income application, will be required to put
down 10% rather than the 5% minimum required today.
Mr.Thomas and his wife, after April 9, 2010
must have a down payment equal to 10% of the purchase price, along with enough
funds to cover closing costs.
2. Tenure: those who have been working in the same
business for greater than three years, would not be eligible for the Stated
Income program and therefore those in this category would have to provide proof
of their income, for example, a Notice of Assessment.
Because Mr.Thomas had only been working as a
Systems Analyst for the past two years in total, they could still apply under
the Stated Income program and be eligible.
Had Mr.Thomas been working three years and 6 months, as a Systems
Analyst, they could not qualify for the home they wanted.
3. Documents: documents will be requested and viewed by
the lender to help determine the length of self-employed which are not always
requested today. The documents a lender
may ask for: a business license, proof
of GST registration, articles of incorporation (if incorporated).
4. Commission: those who are collecting commission would
no longer be eligible for the Self-Employed program.
Mr.Thomas is not paid on a commission basis,
therefore, after April 9, 2010, he could still utilize the Stated Income
program.
5. Limits: a re-finance will be limited to 85%
loan-to-value instead of the current limit of 90% used today.
If Mr.Thomas decides to re-finance his home,
in the coming years, while he is within the insured status range and assuming
self-employed income is still their primary income, they will only be able to
re-finance up to 85% of the value of their property.
It is important to mention that these program
changes only affect those mortgages that are “insured” by the lender therefore,
those mortgages that are not insured, could be reviewed differently from lender
to lender and each lender would specify their underwriting criteria on a
case-by-case basis.
© 2010 This article
was written by Elizabeth Blair at Mortgage Edge on March 11, 2010. Elizabeth
Blair services mortgage clients primarily in Mississauga and all over the
Greater Toronto area
You can contact
Elizabeth directly by phone at (905) 510-5785
by email at
eblair@mortgageedge.ca
or you visit her
website at: www.missmortgage.ca
Elizabeth is licensed
with the Financial Services Commission of Ontario and is also a Member of IMBA
(the Independent Mortgage Brokers Association of Ontario) www.imba.ca
Lic # M08005880 /
Brokerage Lic # 10680. Head Office: Park
Place Corporate Centre, 15 Wertheim Court, Suite 210, Richmond Hill, ON, L4B
3H7, Canada.
