In the United States, eligible first-time home buyers can take advantage of the Federal Housing Authority’s (FHA) lending program to reduce the down payment and interest rate on a home. This, in turn, makes it easier for American consumers (especially younger people) to purchase their first home.
FHA loans are specific to the United States and are not available in Canada. However, Canadians can take advantage of the First-Time Home Buyer Incentive offered by the CMHC, which has similar benefits.
Below, I’ll explain a bit more about these first-time home buyer loans, break down the equivalent of an FHA loan in Canada, and explain some of the requirements you should be aware of.
In the US, the Federal Housing Authority has a lending program that makes it easier for young individuals and families to purchase their first home.
Although FHA loans are technically issued by banks, these particular loans are backed by the US government. This provides insurance to the bank in the event that the mortgage goes into default.
This initiative incentivizes banks to provide mortgages to individuals who may not otherwise be eligible for a mortgage or who would be required to make a large down payment otherwise.
FHA loans aren’t for everybody, but they’re an excellent tool that makes homeownership possible for those who are still building their credit and trying to save money.
The equivalent of FHA loans in Canada are CMHC loans, obtained as part of the housing agency’s First-Time Home Buyer Incentive program.
The Canada Mortgage and Housing Corporation serve as Canada’s national housing agency. This organization is responsible for regulating home sales, rentals, and also provides an incentive for banks to lend to first-time home buyers.
Compared to FHA loans in the United States, Canadian CMHC loans tend to be a little bit stricter. For example, CMHC loans require borrowers to have a higher credit score than FHA loans in the US.
In September 2019, the Canadian government introduced an initiative to help first-time home buyers purchase their first home, even if they don’t have the greatest credit or capital. At the start of the program, the government issued $1.25 billion to help enact the incentive.
So, what exactly does a first-time home buyer incentive entail?
Providing you meet the eligibility criteria (see below), here’s what you can expect to provide as a down payment, depending on the value of the home in question:
|Home Value||Down Payment If Approved For The First-Time Home Buyer Incentive|
|Less than $500,000||5% down|
|Greater than $500,000||5% on $500,000 and 10% on surplus|
It’s important to note that the First-Time Home Buyer Incentive is NOT applicable to homes that are valued at more than $1 million.
Back in 2019, when the program was introduced, this wasn’t an issue. It was easy to find homes for under $1 million. Today, however, that may prove to be a bit more of a challenge, given the increased cost of housing across the country.
That being said, there’s no limit on what type of house you can buy with a CMHC loan. Whether you’re looking for a bungalow or a two-storey home, you’ll be able to purchase either, providing that it’s less than $1 million and your credit falls within the applicable range.
In addition to the restriction on the value of the home, the CMHC has a few other qualifications that borrowers must meet if they want to be eligible for the First-Time Home Buyer Incentive, including:
- The borrower must have a minimum credit score of 600
- Your Gross Debt Service (GDS) Ratio should be less than 39%
- Your Total Debt Service (TDS) Ratio should be less than 44%
Your debt service ratio measures the amount of income you’re earning compared to the amount of debt you have.
Your Gross Debt Service Ratio weighs your income against all of your housing-related costs (mortgage, utility payments, taxes, insurance, etc.). Your Total Debt Service Ratio weighs your income against all of your debts and responsibilities.
The CMHC has a handy Debt Service calculator that you can use to calculate your ratios before you start the application process. This can help you save time by allowing you to determine your eligibility and can help you avoid a denial.
Additionally, the banks responsible for issuing the loans will likely want to see that you have a positive employment history and have been earning steady income for the past year or so.
Here’s a quick rundown of how the First-Time Home Buyer Incentive works and how to prepare for it to ensure that you have a good chance of being accepted.
First, you’ll want to calculate your debt service ratios using the CMHC calculator. This will help you see how much you’re earning and determine how much house you can afford.
To be eligible for the First-Time Home Buyers Incentive, you’ll need to have a credit score of at least 600, which is generally considered “fair” by the credit bureaus. If you don’t know your credit score, you can get your free credit report (and score) from one of these providers.
While the CMHC may not directly verify your income, the bank that’s issuing the mortgage will almost certainly need to verify that you have a steady source of income. To show this, you may need to give the bank access to your CRA tax returns, share bank statements, pay stubs, or other documents.
As the name implies, the First-Time Home Buyers Incentive is designed for first-time home buyers. If you’ve already taken advantage of the incentive, then you cannot do so again.
This incentive is designed to help lower or middle-income taxpayers afford their first house. If you’re buying a $1 million home, it’s probably safe to say that you don’t need the same level of assistance that other home buyers need.
Therefore, this CMHC-backed incentive cannot be applied to homes valued at $1 million or more.
One of the stipulations of these loans is that the borrower is required to purchase home insurance through the CMHC on the property.
This ensures that the lender is covered should an accident happen that destroys or severely damages your home (which is technically owned by the bank until you complete your mortgage payments).
When Do I Have to Pay Back the Money?
You must repay the incentive back after 25 years, or when the property is sold, whichever comes first. You can also repay it in full at any time before, without any penalties.
Although Canada’s First-Time Home Buyer Incentive is a bit stricter than America’s FHA loans, it’s still a great incentive that can make it easier for you to purchase your first home.
In general, a CMHC-backed loan could help you get approved for a lower down payment and get approved for a mortgage with a subpar credit score.
Curious to see how your credit score compares to other Canadians?
Keep on reading to see the average credit score in Canada by age!