Buying a house in Canada is extremely expensive, with the average price for a home across the country currently sitting at $686,371. Given this cost, saving up for a down payment for a mortgage can be tough, leaving many homebuyer hopefuls unable to get into the real estate market. Thankfully, there are government-backed programs available that make getting a mortgage much easier. You may have heard of the FHA loan in Canada, but the FHA loan is a US-based product.
Thankfully, in Canada, there’s an equivalent product to the FHA loan called the CMHC. You can put down as little as 5% through CMHC-backed mortgages. But how does the CMHC-backed loan compare to the equivalent loan product in the US? Does the US-based FHA home loan program beat Canada’s? Let’s take a closer look at the FHA loan and the CMHC loan to see how they compare.
Can You Get An FHA Loan In Canada?
As mentioned above, an FHA loan in Canada does not exist. An FHA loan is a US-based product. However, in Canada, CMHC-back mortgages are similar to the FHA loan. Both help borrowers qualify for homes with no credit history or low down payments.
What Is The FHA Loan?
An FHA home loan is a type of mortgage that is issued by an approved lender and insured by the Federal Housing Administration (FHA), a federal government agency in the US. These home loans have more flexible lending requirements, including lower down payment and credit score criteria, so they’re easier to get approved for compared to conventional loans.
For this reason, FHA loans are popular among first-time homebuyers and borrowers with low credit scores.
While an FHA home loan may be easier to qualify for, it costs money. Borrowers who take out an FHA mortgage must pay an upfront mortgage insurance premium (MIP). While borrowers pay the premiums, the insurance policy actually protects the lender in case of mortgage default.
In addition to the upfront costs made at the time of closing, borrowers must also pay an annual insurance premium that can be divided into 12 monthly payments. The insurance premium depends on the loan amount and down payment.
What Is The FHA?
The Federal Housing Administration (FHA) is a US government agency that was founded by President Franklin Roosevelt in 1934. At the time, the housing industry in the US was very weak. Mortgage terms were extremely difficult for homebuyers to meet, leaving most Americans unable to buy a home.
The FHA’s main role is to insure mortgages in an effort to lower the barrier to mortgage approval and homeownership. By insuring mortgages, approved lenders can offer loans to bad credit borrowers who may be unable to secure a traditional mortgage.
The FHA offers multiple home loan programs, including the following:
- FHA 203(b) program. This is the most common FHA loan among homebuyers, particularly first-timers.
- FHA 203(k) rehabilitation loan. This loan is designed for borrowers who want to buy or refinance a home that requires renovations.
- FHA Energy Efficient Mortgage (EEM) program. This loan is meant to help borrowers purchase or refinance an energy-efficient home.
FHA Loan vs. A CMHC Mortgage
In Canada, the FHA is equivalent to the Canada Mortgage and Housing Corporation (CMHC). Similar to the FHA, the CMHC insures mortgages, particularly high-ratio mortgages, which are mortgage loans with a loan-to-value ratio higher than 80%. Down payments of less than 20% of the purchase price of a home must be insured by the CMHC.
CMHC-backed mortgages allow homebuyers to purchase homes with very low down payments. In Canada, you can make a down payment as low as 5% of the property’s purchase price. This makes it easier to obtain a home loan.
However, CMHC insurance comes with a cost, as is the case with FHA loans. Borrowers who take out a CMHC-backed home loan must pay insurance premiums, which can be paid in one lump sum or rolled into mortgage payments for the duration of the loan term.
The exact cost of the premium is based on the down payment amount and ranges anywhere from 0.60% to 4.0% of the total loan amount. The final calculation is made when you apply for a mortgage.
FHA Loan Requirements
Qualifying for an FHA loan may be easier than a conventional mortgage, but there are still criteria to be met, including the following:
Minimum Credit Score
You must have a credit score of no less than 580 to get approved for an FHA loan with a down payment of 3.5%. If your score is under 580, your down payment must be at least 10% to qualify for an FHA loan.
FHA lenders will look at your debt-to-income ratio, which measures your debt relative to your monthly income. The FHA’s guidelines stipulate that debt-to-income ratios must be no higher than 43%, generally speaking. This includes all household debt, including housing costs.
The subject property must also meet minimum property standards to be financed by an FHA loan. Namely, the home should be safe for occupancy and have no physical defects that could compromise the structure’s integrity. Further, the home must be the borrower’s primary residence.
To reduce the risk for the borrower and lender, there are certain requirements that must be met for CMHC-insured loan approval:
Minimum Credit Score
The CMHC requires that at least one borrower has a minimum credit score of 600.
The CMHC will also look at your debt-to-income ratio. More specifically, CMHC requires a Gross Debt Service (GDS) ratio of no more than 39% and a Total Debt Service (TDS) ratio of no more than 44%. Your GDS refers to the portion of your monthly income that goes toward your housing costs. Your TDS refers to the share of your monthly income that covers your housing costs and all other debts.
The maximum purchase price of the home must be under $1 million, with an amortization period of no longer than 25 years.
Both the FHA loan in the US and the CMHC mortgage in Canada are designed to help borrowers who otherwise would have trouble getting approved for a conventional loan. These organizations offer programs to assist buyers with lower down payments. One of the main barriers to getting into the housing market in both Canada and the U.S.