FHA loans are not available in Canada, they only exist for homebuyers in the United States.
In Canada, the closest equivalent to an FHA loan is a mortgage insured by the Canadian Housing and Mortgage Corporation (CMHC).
What is an FHA Loan?
An FHA loan is a mortgage product guaranteed by the Federal Housing Administration in the United States.
Banks and other financial institutions that the agency approves issue these loans to eligible homeowners.
Qualification criteria for an FHA loan are less stringent than that found on a standard mortgage application,
The minimum credit score needed for an FHA loan is 500, considered “very poor” in the United States.
To put things in perspective, lenders usually view a credit score between 670 to 739 as “good.”
As with any mortgage, you must provide a minimum down payment, which depends on your credit score:
- If your score is 580 or higher, you need to put down at least 3.5%
- If your score is between 500 and 579, you need to put down at least 10%
In addition, you’ll also need to purchase FHA mortgage insurance, which acts to protect your lender from financial losses should you default on your loan.
It consists of two components:
- Upfront premium – 1.75% of the loan principal
- Annual premium – 0.45% to 1.05% of the loan principal (paid monthly)
Each year, the FHA sets limits on the maximum mortgage size borrowers can qualify for when applying for an FHA loan. These limits vary based on where you live.
What is the Canadian Equivalent of an FHA Loan?
No mortgage in Canada matches the features of an FHA Loan precisely.
However, the type that most closely resembles one is a CMHC loan.
Like an FHA loan, a CMHC loan is suitable for homeowners who wish to purchase a property but don’t have a vast sum of money for a down payment and possess a lacklustre credit score.
So, how do you go about acquiring a CMHC mortgage?
First, you must make a minimum down payment, the amount of which varies according to your property’s final selling price:
|Home Value||Minimum down payment|
|Less than $500,000||5%|
|Between $500,000 and $999,999||5% on the first $500,000 and 10% on the remaining portion|
|$1 million or more||20%|
As you can see, the minimum amount you can expect to contribute for a down payment, regardless of your home’s sales price, is 5%.
This figure is slightly higher than the 3.5% minimum required for an FHA loan.
It’s important to note that you can’t acquire a CMHC mortgage loan for a property valued at $1 million or more.
Second, you must meet the eligibility criteria, which primarily concern your credit score and debt service ratios.
The minimum credit score you need to qualify for a CMHC mortgage is 600, considered “fair.”
This threshold is substantially higher than the minimum required for an FHA loan.
Regarding debt service ratios, lenders calculate two ratios that they assess in your application: gross debt service ratio (GDS) and total debt service ratio (TDS).
Your GDS and TDS ratios should not exceed 39% and 44%, respectively, to qualify for a CMHC mortgage.
Lastly, you must purchase mortgage insurance from the CMHC, which mitigates lenders’ risk against the risk of you defaulting, much like FHA mortgage insurance.
The amount you must pay is calculated as a percentage of your mortgage and determined by your loan-to-value (LTV) ratio, which measures your mortgage size relative to your home’s price.
The CMHC provides a handy table on their website that shows your expected outlay for this expense.
In addition to the CMHC, there are two private companies that provide mortgage insurance in Canada, Sagen and Canada Guaranty.
Pros of a CMHC Mortgage
- You can purchase a home sooner as you need less money for a down payment
- You can get approved with a lower credit score
- You can add the mortgage insurance to your mortgage and pay it slowly over time rather than pay it upfront
- Since the government guarantees your mortgage, your lender will be willing to offer you a lower interest rate on your mortgage
Cons of a CMHC Mortgage
- A lower down payment translates to a higher mortgage, which means you end up with a higher monthly payment and pay more in interest
- CMHC insurance can increase the cost of your mortgage substantially in the long run, possibly negating any savings you realize from a lower interest rate
- Some lenders may impose eligibility criteria that are more stringent than the CMHC regarding credit scores and debt service ratios
Frequently Asked Questions
- Is there an FHA loan in Canada?
No, FHA loans are available only in the United States for American residents. The closest equivalent to an FHA loan in Canada is one that the CMHC insures.
You can qualify for a CMHC mortgage with a small down payment (potentially as little as 5% of your home’s price) and a credit score as low as 600.
- What is FHA 203k loan in Canada?
The purpose of an FHA 203(k) loan is to help homeowners finance the purchase and renovation of a home. This type of mortgage loan is available strictly in the United States.
The Canadian version of an FHA 203(k) is the CMHC Improvement Mortgage.
It’s the ideal option if you’re looking to acquire a home that needs significant repairs and upgrades, but you lack the necessary funds to pay for this cost out of pocket. And because the loan is backed by the federal government (CMHC being a crown corporation), it has more lenient eligibility criteria.