Insured Stated Income Programs Tighten Up

stated-income CMHC has felt for a while that too many people apply for stated income mortgages who shouldn’t.

Therefore, effective April 9, CMHC is adding more restrictions to its Self-Employed stated income product..

For one thing, it’s reducing the maximum allowable loan-to-value

Self-employed borrowers who choose to apply under this program, and not verify their income using traditional means, will have to put down 10% when purchasing a home (instead of 5% today).

Stated income applicants who wish to refinance will be limited to 85% loan-to-value (instead of 90% today).

CMHC says:

  • The Self-Employed program is intended for self-employed borrowers “who have difficulty providing documentation for their current income level.” These are often people who’ve recently begun to work for themselves.
  • Self-employed borrowers in the same business for over three years will no longer be eligible for approval without traditional proof of income.
  • A business license, GST license, or articles of incorporation will be required to validate the applicant’s length of self-employment.
  • Commissioned employees are no longer eligible for approval under the Self-Employed program.

As insurers pull back further from the stated income market, some expect uninsured lenders to eventually fill the void.  Self-employed borrowers, with hard-to document income, will then pay notably higher rates and fees as a result of using such programs.

  1. This change seems to be more about politics and emotions than economics.
    Self employed people’s income is verified using their income from previous years. This means that their income is often based on very old data and it can take several years for income increases to have a significant impact on their allowable borrowing.
    I would completely support the change if CMHC was loosing money on their stated income products. Right now, I think the government is profiting from stated income products so I would like to see them continue to provide these profitable services for the benefit of the people who use them and for the benefit of all Canadian Tax Payers.

  2. The thing that gets me is that CMHC says they want to house Canadians. I guess this means they want to house Canadians as long as they aren’t self employed.
    I understand they want people to not lie on stated applications, but the solution is simple, look in their bank accounts!!!
    If a qualified self-employed person says they make $120,000 a year and you see $10,000 going into their bank account each month, give them a mortgage!
    That’s how the stated income program should work.
    CMHC has instead decided to penalize self-employed borrowers because they engage in legitimate tax planning and report their income in a different manner.
    Unfortunately the above gentleman is right. This is a case of politics over common sense.

  3. CMHC (The Government)is becoming to left for me. I will be only sending my clients to lenders that use Genworth, AIG & lenders that support free enterprise.

  4. I think they are taking this a little too far. Don’t cut off 5% down payment for BFS (business for self), just make it harder to obtain so only those not over leveraging themselves can still a mortgage. How about put a restriction that max’s out at a certain percentage above the total on line 150 of the NOA (notice of assessment) regardless of company type. Demanding that everyone must have 3 years business licenses or GST returns so cutting out too much of the market. Personally, I find that half of BFS clients only use T1’s to prove self employment and don’t have or need a business license.
    Just my thoughts.

  5. The biggest problem is that self employed people have to finance working capital and equipment personally as it is very hard and expensive to get banks to lend to small business. Thus all this debt shows up on their personal credit and thus has to fit into their TDS. Makes thing tough especially when the goal of tax returns is usually to reduce tax. Lenders are stuck on what shows up on line 150.
    The other issue is alot of lender have pulled back their self employed stated income products to 65%. This leaves a big gap. I agree that 95% is way to aggressive, but how about a compromise allowing the product at maybe 80% for all self employed. That way some one that is self employed with good credit can still access funds at reasonable rates. The way it is headed now is back to the sub prime lenders and private lenders.

  6. JJ- they already give us 15% above line 150 income to qualify. Guess what- that brings your income from $22K to what, $33k, still peanuts to qualify for a mortgage.
    the one aspect of the rule I don’t understand is the 2-3 year rule. can’t be less than 2 years, can’t be more than 3 years. confusing, and irritating. most bfs clients of mine are well establishd for much longer, and only THEN can they afford property, NOT when they are 2-3 years new to their business.

  7. If you go to 80% for bfs, you don’t need “a” lenders, you can go to the trust companies and get very good rates and they don’t ask for anything except a letter from you, and proof of business ownership. no, 90% should be the rule, but not to limit the #of years *unless I am misunderstanding this whole thing*.

  8. I don’t know if 95% stated income loans are a good idea or not. I rally don’t have the stats on how many defaults there are? how much foreclosures cost? or how much underwriting/stated income loan administration costs.
    My math says that stated income loans are probably very profitable. Lets assume that 100 home buyers go out and buy homes for $500,000 with 25 year amortarizations. They each put down 5% (25,000) and pay 28,500 in loan insurance leaving them owing 503500. Lets assume that the day after these people buy there homes there is a horrible economic collapse, business start failing and defaults shoot up from .5% to 15%; Property values drop 30%. The banks foreclose on the 15 homes and sell them for a total of 5250000 but the borrowers owed
    7,552,500 so the banks claim 2,302,500 from the in 2,850,000 insurance leaving $547500 left over.
    These numbers don’t account for legal fees, the borrowers paying any principal, or a few other details but if self employed home defaults reach 15% Canada has much bigger problems to worry about than the risk of CMHC loosing money.

  9. I think its time for a poll. Why do you think the government is tightening the rules for stated income financing
    * They don’t like Stated income loans / think they are too similar to US subprime loans.
    * They are scared that self employed people will take out home equity to invest in rental properties with 20% down thereby bypassing their new rental property insurance rules.
    * They are scared that self employed people will use high stated incomes to minimize the TDS calculations on there own home thereby helping them invest in other properties.
    In case you are wondering about my biases.
    * I have been self employed for 5 years.
    * I don’t think I would consider a stated income loan because the insurance rate is too expensive.
    * I am in favour of tightening stated income rules. I just don’t think that current changes are the right approach.
    * It seems to me that this government keeps making CMHC changes that are reasonably simple for people to understand. Instead of making the best possible changes.

  10. Rob – I agree with Jake & JJ –
    1st of all, the 3 year rule is confusing. Can you clarify this? – I would think that stating your income when you have 3 years in the business is realistic.
    2nd of all, is the stated income product all together going away?
    – I can understand stated income not being available for BFS with less than 3 years.
    Can you shed some light on the stated income and 3 year rule… it seems open to interpretation?

  11. 101.1% agree with Kenny.
    CMHC has bowed to public pressure and enacted unreasonable and restrictive policies. It is high time CMHC become privatized and run like a real business.

  12. Hey Computer Guy:
    Maybe CMHC is just saying we a are a Crown Corporation and we should not have products that promote the underground economy. Perhaps Genworth will not change their product. They did bring it out first.

  13. This is a poorly thought out and rolled out program by the conservative politicians.
    They have in effect cancelled the BFS stated income program. The rules state that you must be in business two years, but cannot exceed three years, in order to qualify for this program. This leaves a window of only one year, which is a sliver of the market. Terrible job conservatives.

  14. Let me get this straight. CMHC will insure
    An immigrant without a long established job or credit score to 95% LTV
    A non-permanent resident without a credit score to 90% LTV
    But CMHC will not insure
    A hard working self-employed Canadian with 3 years in business, bank statements proving cash flow and a 750 beacon, despite the self employed Canadian paying DOUBLE the insurance premium as the immigrant??
    Brilliant!
    CMHC will consider “alternate sources of payment history” for a “newcomer to canada.” They should accept the same from a honest self-employed applicant who has 12 months of bank statements to prove cash flow.
    Maybe it is just me, but this is a bad double standard. Canada’s 2.6 million self-employed deserve much much more.

  15. I don’t know if stated income mortgages are used to promote the underground economy or if they are prime rely used to work around income verification challenges for self employed people. I lean towards the later because anyone cheating on their taxes wouldn’t want to draw attention to themselves by telling the government they make more money than they are declaring.
    On top of that I don’t know how 95% LTV stated income purchase mortgages and 90% LTV Refinance promote the underground economy more than 90% LTV purchases and 85% LTV Refinances?

  16. Hi AB Guy,
    Nosir, CMHC’s stated income program is not going away–for now anyway. But it will apply to a smaller audience starting April 9.
    As we understand it, CMHC is saying:
    * The stated program is not available if you have been self-employed in the ‘same’ company for over 3 years. They feel you should be able to document your income by then.
    * The borrower needs at least 2 years experience in the same field, NOT necessarily in the same company and NOT necessarily as a self-employed worker.
    Hope this helps!
    Rob

  17. Hi Dan,
    From what we’ve heard so far, Genworth and AIG will have similar guidelines to CMHC. This is required for their government guarantee.
    That said, there may be subtle differences with specific guidelines once all the rules are eventually finalized. We have to wait and see…
    Cheers,
    Rob

  18. I recently went into this program and was approved for a 200k loan. But low and behold my mortgage broker tells me.. Oh buy the way you have 3 weeks to find your house or your out of luck.
    I easily had 5% down.. In-fact I have 15% to put down and I have been self-employed for 11 years.. So now I have to prove my income with 10% down as well.
    I would say the program has been rendered pointless. Which is probably CMHC point.. Lets kill the program but lets kinda beat around it first!
    You can have a loan if you’ve been in business for less then 3 years but not if you’ve been in business for 10 years and can prove it.
    LOL I can’t help but laugh at stuff like this.
    Just remove the program all together and let the immigrants have all our houses.
    Ill go live in a ti-pi and smoke a pipe.

  19. The CMHC is a complete joke. It is none of their business who wins or loses on buying a house. Why do they make these people seem like high risk and prevent them from buying a house. If you examine the facts, yes maybe more default but there are just as many that you turn away with the pathetic rules. The last time I checked it was up to an individual to make a good or bad decision and not the cmhc to do it for us. If someone takes out a mortgage they can’t afford then that is their problem. I am willing to take that risk but the CMHC won’t let me. Jim flaherty and the CMHC are simply punishing the self employed who have always been know manage their money and taxes better than the T4 saps. Shame on CMHC, home buyers should unite for a class action.

  20. you are wrong with your statement “It is none of their business who wins or loses on buying a house”. They are underwriting the risk and are responsible if you default. If you want a cmhc insured mortgage then just refile your last 2 years taxes, and pay the tax on your declared income and qualify for the mortgage. Otherwise you can get a stated income mortgage from a b lender that doesn’t need to be insured by the national insurers and pay the appropriate rates. Your choice!

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