Effective July 9, 2012
Buying your first home is a big decision. It is important you understand the amount of mortgage you are qualified for. If you are purchasing a home with less than a 20 percent downpayment you are considered a “high ratio” borrower, and required to add mortgage default insurance to your mortgage loan.
How do these high ratio mortgage rule changes affect you?
As of July 9, 2012, the following changes come into effect:
1 High ratio borrowing rules have changed for government insured mortgages — bringing back the amortization time to 25 years (from 30 years) — a level it once stood at.
Over the lifetime of the mortgage the homebuyer will save interest, albeit the monthly mortgage payment will be higher. As an example a $250,000 mortgage @ 3.0 percent interest rate with a 25 year amortization equates to a monthly payment of $1,183.11. This is $131.61 more than the same mortgage with a 30 year amortization. Yes, this change will increase your monthly mortgage payment, but you will also pay off your mortgage sooner and save money on interest.
For homebuyers with 20 percent or more downpayment, the amortization is at the discretion of the lender and borrowers may still be able to find lenders offering 30 year amortizations.
2 High Ratio Default Insurers will no longer insure homes where the purchase price is greater than $1 Million. This means purchasers at this level will require a minimum of 20 percent downpayment.
3 The Gross Debt Service (GDS) ratio which represents “Principle, Interest, Property Tax, Heat (and 50 percent of condo fee if applicable)” as a percentage of your gross monthly income will be enforced at 39 percent.
Total Debt Service (TDS) ratio which represents “Principle, Interest, Property Tax, Heat, (and 50 percent of condo fee if applicable) PLUS other monthly expenses (car loan, credit cards etc.)" as a percentage of your gross monthly income remains unchanged at 44 percent.
Previously, often high ratio borrowers with credit scores greater than 680 could have the GDS ratio waived — which meant their mortgage and other basic property costs (PITH & 50 percent C) could total 44% if they had no other debt. Now it is capped at 39%.
Credit scores below 680 (but at least 600) may be qualified as before with GDS ratio of 35% and TDS ratio of 42%.
4 Mortgage refinancing will be limited to 80 percent loan to value (LTV) reduced from 85 percent. This is for current homeowners looking to refinance to take money out of their home.
Mortgage Renewals — How Will These be Affected?
As long as you don’t change the mortgage (ie. you don’t need to borrow more money), your amortization stays the same. This may apply even if you change lenders.
How Does This Affect Existing Mortgage Pre-Approval?
Beyond July 9, 2012 if you don’t have a “live” deal, you will be subject to the new rules. If you have an accepted agreement of purchase & sale and have converted your pre-approval to a live deal before July 9, 2012, you will fall under the old rules. You will be required to close (take possession) of the home by December 30, 2012.
Any amendments to existing mortgage approvals with an accepted agreement of purchase & sale dated before July 9, 2012 will be reviewed on a case by case basis.
Remember real estate is a long-term investment.
Kimberley Marr is the author of Your First Home: A Buyer's Kit
published by Self-Counsel Press. For additional information visit Kimberley Marr's website
Her book is available:
in a print edition
and as an ebook
Click cover to enlarge.