Table of Contents Contents
In the US, they have FHA loans for home buyers. What do they have in Canada? Well, in Canada, we have CMHC. CMHC-backed loans allow Canadians to purchase a home with low down payments of as little as 5%. There are some stipulations, though.
FHA Loans and What They Are
The FHA stands for the Federal Housing Administration. While FHA loans aren’t found in Canada, they are available in the US. The FHA backs these loans and allows Americans to borrow 96.5% of the mortgage, leaving them only to pay 3.5% as a down payment.
These are intended for borrowers who have difficulty getting mortgages through traditional lenders, and they must meet the qualifications in order to get the loan. Most who use these are either new to credit or don’t have a full down payment. There is actually more than one type of FHA loan.
How FHA Loans Work
The first thing about understanding FHA loans is that the US federal government doesn’t administer these particular loans, the FHA insures them. The FHA is a US government agency, not a lender. They’re issued by private lenders that are FHA-approved, which could be anyone from credit unions to banks to online lenders, as long as you meet the minimum property standards.
You can get FHA loans for new construction as well as:
- Single-family homes
- Multi-family homes
- Condos
- Manufactured homes with permanent foundations
The requirements for approval for an FHA loan, though, vary from lender to lender. They measure risk factors such as gross debt service, total debt service, and other factors; they just have more lenient requirements. They’re also known as high-ratio mortgages.
They also have FHA energy-efficient mortgages, which allow you to finance energy-efficient upgrades to save on your energy bills. These are different from conventional mortgages and help families save money in the long run.
FHA Loan Requirements
When it comes to FHA loans, as long as the lender at least requires the minimum required by the FHA, their rules vary based on the lender. Each lender will also charge their interest rates and fees.
Based on FHA guidelines, the minimum credit score required for an FHA loan is 500. However, some FHA-approved lenders would like you to have a credit score of 600 or even 620. You need a minimum credit score of 580 in order to qualify for the minimum lower down payment amount of 3.5%.
For lower credit scores below 580, you need to have a minimum down payment of 10%. Unlike traditional mortgages, though, there is no minimum income that you need to meet. There are a few eligibility criteria, though.
- You must show an income history of at least 2 years
- You must have a credit history
- You must not have any delinquent debts or judgements
- You’re allowed to get cash gifts to help with a down payment
Another factor to consider is the cost of the property. Not all property values will qualify. Generally, in lost-cost areas, you can get FHA loans for properties up to $ 472,030 in value. In high-cost values, you can get FHA loans on properties up to $1,089,300 in value.
These requirements make them different from conventional loans and allow buyers more leniency when it comes to purchasing properties.
FHA Canadian Equivalent
While we don’t have the FHA loan in Canada, we do have the CMHC. The CMHC, also known as the Canada Mortgage and Housing Corporation, offers mortgage loan insurance to specific home buyers. While the Canadian government doesn’t control the CMHC, it is a crown corporation government by a minister. This is the Canadian FHA loan equivalent, as they also don’t offer loans.
In Canada, CMHC insurance is typically required for those who are putting down a down payment of less than 20%. It protects lenders if the borrower defaults, but it also allows buyers to purchase with a down payment of less than 20% while getting an interest rate similar to those who have a down payment of 20%. It, however, does require that the property you’re purchasing is your primary residence.
Specifics of CMHC Insurance
With CMHC insurance, how much of a down payment that’s required depends on the purchase price of the home. It’s also important to keep in mind that this is only available to first-time home buyers.
As a first-time home buyer with CMHC insurance, you’re only required to put down 5% on the purchase of a home under $500,000. For a home with a purchase price higher than $500,000, 5% is required on the first $500,000 and 10% is required on the rest. If the purchase price is above $1,000,000, then it likely won’t qualify. The purchase price or renovation value must be below $1,000,000 in order to qualify for CMHC insurance. You must also have a minimum credit score of 680.
You also have to consider the cost of CMHC insurance since you pay mortgage insurance premiums based on the amount that’s covered. These insurance premiums are based on the loan-to-value ratio.
- 0.60% for up to and including 65%
- 1.70% for up to and including 75%
- 2.40% for up to and including 80%
- 2.80% for up to and including 85%
- 3.10% for up to and including 90%
- 4.00% for up to and including 95%
The exact cost of insuring mortgages also depends on the amortization period of the loan as well. Here’s an example:
Say you’re purchasing a place for $250,000 with an amortization of 25 years. The cost of a 5% down payment on that home would be $12,500. Because the down payment you’re putting down is only 5%, your premium is 4.00%, making the premium for CMHC $9,500. This payment is divided among your monthly payments depending on what your interest rate is and what your payment frequency is for the loan amount. Mortgage rates will vary, so even with these variables, the mortgage payments will be different for everyone.
How to Apply for CMHC Insurance
In order to get CMHC insurance in Canada, you don’t need to apply through the CMHC. CMHC is given through your mortgage, and you would qualify through your mortgage broker or mortgage company. Basically, once you go in for a mortgage pre-approval, they would disclose how much you could get approved for based on your income and down payment. This would include CMHC approval and provide mortgage insurance.
Obtaining FHA Loans in Canada
If you live in Canada, you’re unable to get an FHA mortgage. However, if you’re a Canadian citizen but also a permanent resident of the US, then you can qualify for a mortgage loan. This means you could also qualify for FHA mortgage loans.
Buying for the First Time in Canada
If you’re considering jumping into the Canadian housing market, buying a home could be easier than you think. There are plenty of ways to purchase a home, even if you don’t have the full down payment. One way Canadians do this is with the Home Buyers Plan.
The Home Buyers Plan is a program where Canadians are able to take money out of their RRSPs penalty-free. By doing this, they’re able to use their funds to purchase a home without having to borrow. They also have 15 years to put the funds back.
You can also purchase a home by having the funds for a down payment gifted to you. This isn’t always an option for everyone, though. If it isn’t, some lenders actually let you borrow the funds. If you’re doing this, though, it’s important to remember that you have to pay back not only the mortgage loan but also the down payment loan.
With any of these methods, you could have mortgage and loan options with or without mortgage insurance. If you are getting the insurance, it’s important to factor in the mortgage insurance premiums and how they affect your mortgage approval.
Final Thoughts
FHA mortgages and CMHC mortgages are actually quite similar. Both of these types of loans are insured. However, only one of them is available in Canada. The principle behind both of these insurances is the same, though. They allow borrowers to purchase a home they may not have been able to purchase without the insurance.
These are higher-risk borrowers who don’t have the best credit, don’t have the full down payment or don’t meet other requirements; they can, however, prove that they’re able to pay for the mortgage. These are different from other programs that provide shared equity mortgages; the equity with these loans is your own.
Whether or not you’re able to qualify for a CMHC mortgage depends on the cost of the home. With housing prices rising these days, many homes don’t qualify for the 5% don’t payment anymore. You may have to pay 10% on any portion of the payment over $500,000, and properties over $1,000,000 don’t qualify.
This isn’t something you have to worry about too much, though. When you’re ready to purchase a home, mortgage brokers or mortgage agents will be able to determine what kind of home loan you qualify for.
