FHA Loan Equivalents in Canada
What You Should Know
- FHA stands for Federal Housing Administration. FHA facilitates home ownership in the US by insuring mortgages used for purchasing one's primary residence.
- Similarly, in Canada, Canada Mortgage and Housing Corporation (CMHC) is a Crown corporation facilitating home ownership by insuring mortgages.
Canada Mortgage and Housing Corporation (CMHC)
Eligibility Conditions for CMHC Mortgage Default Insurance
In Canada, the equivalent program to the Federal Housing Administration (FHA) mortgage in the United States is the Canada Mortgage and Housing Corporation (CMHC) insured mortgage. The CMHC provides mortgage insurance to lenders to reduce the risk of issuing mortgages to home buyers with a small down payment. This insurance allows lenders to offer borrowers more flexible terms and lower mortgage interest rates.
CMHC has a set of rules to provide mortgage insurance. CMHC wants the borrower to have a minimum credit score of 600. The proposed mortgage should also be affordable for the borrower. To ensure affordability, CMHC considers debt service ratios; specifically, CMHC requires a GDS ratio of less than or equal to 39% and a TDS ratio of less than or equal to 44%. CMHC also limits its service to homes priced at less than $1 million. To limit risk, CMHC only permits loans which amortize in 25 years or less.
By law, a Canadian financial institution cannot lend more than 80% of the value of the underlying real estate in a mortgage unless that mortgage is insured. With mortgage default insurance, a Canadian can purchase a house with a down payment as low as 5% if the purchase price is less than $500,000. If the purchase price is less than $1 million but greater than $500k, the minimum required down payment is $25k plus one-tenth of the price over $500k.
Those making a down payment of less than 10% of the purchase price should demonstrate that they own their down payment and it's not borrowed money. A mortgage where the down payment is less than 20% of the purchase price (i.e., a loan-to-value ratio greater than 80%) is considered a high-ratio mortgage.
The higher the loan-to-value (LTV) ratio of a loan, the riskier it is. Therefore, mortgage default insurance premium increases with LTV. You can calculate the exact premium for a mortgage using WOWA’s CMHC calculator. Note that the CMHC premium can be added to your mortgage. You can use WOWA’s mortgage calculator to determine your monthly mortgage payment, whether it is insured or not.
Federal Housing Administration (FHA) Mortgage Insurance
An FHA mortgage is a type of home loan insured by the Federal Housing Administration (FHA), which is part of the US Government. These loans are designed to make it easier for first-time homebuyers and those with lower credit scores in the United States to qualify for a mortgage. CMHC is its counterpart in Canada.
The FHA insures the loan, which means that if the borrower defaults on the loan, the FHA will pay the lender. This insurance makes it easier for lenders to approve loans for borrowers who might not qualify for conventional loans. The down payment required for an FHA loan is typically lower than for a conventional loan.
The Federal Housing Administration (FHA) is a US government agency that was established in 1934 as part of the New Deal. The FHA is part of the United States Department of Housing and Urban Development (HUD), and its primary role is to insure mortgages, making it easier for people to qualify for home loans. The FHA does this by insuring mortgages made by approved lenders, which allows lenders to offer loans to borrowers who might not qualify for conventional loans.
The FHA offers several home loan programs, including the FHA 203(b) program, the most common type of FHA loan. Other programs include the FHA 203(k) rehabilitation loan, which is for borrowers who want to purchase or refinance a home that needs repairs, and the FHA Energy Efficient Mortgage (EEM) program, which is for borrowers who wish to buy or refinance a home that is energy efficient.
The FHA sets standards for the properties that can be purchased or refinanced with an FHA loan. These standards are called minimum property standards (MPS). The FHA also sets guidelines for the creditworthiness of borrowers. For example, borrowers with a credit score of 580 or higher may be eligible for a loan with a down payment as low as 3.5%.
FHA loans are popular among first-time homebuyers because they typically require lower down payments and credit scores than conventional loans. However, FHA loans have more stringent requirements for the property's condition, and borrowers must pay mortgage insurance premiums (MIP).
FHA vs. CMHC
| Aspect | Minimum required credit score | Minimum down payment | Premium Structure |
| FHA | 580 500 | 3.5% 10% | Upfront+ongoing |
| CMHC | 600 | 5% | Upfront |
FHA offers mortgages to people with lower credit scores compared to CMHC, but in addition to the initial payment of mortgage insurance premiums (MIP), you have to make MIP payments year after year after year. Also, FHA can only be used for your primary residence.
CMHC offers a CMHC Certificate of Insurance (COI) after you make a payment when closing the home purchase deal. This certificate stays valid until the end of your amortization period without further payment. You can even renew with another lender while using your original COI. But you cannot have more than one COI at a time. So while you can have multiple mortgages, you can’t have more than one valid mortgage insurance from CMHC.