Most people finance the purchase of their homes with a mortgage loan. Historically, financial institutions such as banks or other lenders in relation to giving a mortgage loan required at least 25% of the purchase price of the property as a down payment, there after loaning the remaining 75% in a mortgage. However, with the emergence of Mortgage Insurance, purchasers of real estate can now make a down payment as low as 5% of the total purchase price and the remaining 95% is covered in the mortgage loan. Under the rules of the Canada Mortgage and Housing Corporation (CMHC) purchasing homes costing less than half a million dollars only require a 5% down payment. However, it is important to know that if the price to purchase a home is more than half a million, CMHC will require a 5% down-payment up to $500,000 and the a further 10% down-payment on the remaining portion.
That is to say for instance if a home costs $800,000;
- For $500,000 of the price a 5% mortgage will be required = $25,000;
- And for the remaining $300,000 dollars a 10% percent down-payment will be required = $30,000;
- Therefore, the total down-payment in order to gain Mortgage Insurance with CMHC will be $25,000 + $30,000 = $55,000
MORTGAGE LOAN INSURANCE;
It is sometimes referred to as a Mortgage Default Insurance or Mortgage Loan Insurance. A Mortgage Insurance acts as a protection for lenders in case the purchaser of real estate fails or is unable to pay back the mortgage loan. Generally, where a purchaser intended to buy real-estate with less than a 20% down payment the financial institution granting the mortgage loan will require that the purchaser arrange for the relevant mortgage insurance.
What are the requirements to qualify for a Mortgage Loan Insurance;
Other than the general requirements already mentioned above, the following requirements must also be satisfied in order to qualify for a Mortgage Loan Insurance;
- the home must be located in Canada;
- the purchase price must not exceed $1 million;
- the home must be used for full-time personal occupancy;
- the total monthly housing costs otherwise known by the technical term ‘Gross Debt Service’ (GDS), which includes mortgage payments and any property taxes must not exceed a maximum of 39% of gross monthly income. (The GDS ratio is generally restricted by the \
- CMHC to 35% however for some purchasers with a more reliable and/or higher income the limit may be raised to 39%);
- the total debt load (TDS), which includes total monthly housing costs plus other debts should not exceed a maximum of 44% of gross household income (The TDS ration is generally restricted by the CMHC to 42%, although, for some borrowers with a higher and/or more reliable income and good credit CMHC may allow may be allowed the TDS ratio to exceed the guidelines for up-to the maximum 44%);
- the purchasers credit score must be a minimum 600;
- the buyer must have proof of income to verify that they can service the loan.
For more information please contact one of our experienced Real Estate Lawyers at MEHDI AU LLP.
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