Qualifying for a New Home Gets a Little Harder

Shortly after Genworth announced the expansion of its Homeowner Assistance Program - a program designed to keep struggling homeowners in their homes - the mortgage default insurer quietly made it more difficult for would-be homeowners to qualify for a mortgage.

While the insurer notified mortgage brokers and other mortgage industry members of its tightened insurance guidelines - effective April 18 - the public was left out of the loop. As of April 21, there was no press release announcing the changes on the company's website, and no one from the marketing department would return my request for more information.

Mortgage default insurers protect banks and lenders from mortgage defaults, but the premiums are paid by mortgage holders. Mortgage default insurers also have the power to determine which borrowers they will and will not insure - a decision that greatly affects who a lender will lend money to.

Higher credit scores needed

Genworth's sweeping changes to its insurance criteria have made things much more difficult for hopeful homebuyers who have less than a 20% down payment to put towards a mortgage.

While a 650 credit score used to be enough for these clients to obtain a high ratio mortgage, they will now need a score of 700 if they are planning to put down between 10-14.99% of the home’s sale price. Those planning to put down between 15-20% can get away with a 680 score. The average Canadian has a score of around 700.

Individuals looking to purchase a high-rise condominium will also face new credit score minimums - something that wasn't a factor before. If you're looking to put down a 10-14.99% down payment on a condo, you'll now need a 700 score. For those looking to put down 15-20%, a 660 score will suffice.

Higher income or lower debt needed

The company also lowered its maximum Total Debt Service (TDS) ratio from 44% to 42%. TDS is a number that is used to qualify an individual for a mortgage and is calculated by dividing your total monthly debts by your monthly income.

By lowering the maximum TDS, homeowners looking for a mortgage insured by Genworth will have to have less debt or more income than previously required.

More pinching to come?

Genworth is citing the tough economic climate as the main reason for tightening its guidelines. The thing is, the move has made the company much less competitive in the mortgage default insurance market which has two other players - AIG and CMHC. Because of this, many in the mortgage industry are speculating that the other players could follow suit - if they haven't unofficially already.

As an aspiring homeowner, the best thing you can do is to improve your credit score as much as possible before applying for a mortgage.