OSFI (Office of the Superintendent of Financial Institutions) is an agency of the Government of Canada. They are overseen by the Minister of Finance. The purpose of OSFI is to regulate banks, insurance companies, trust companies and loan companies. This includes mortgage providers.
One of the mandates of OSFI is to write and administer regulatory framework that promotes procedures for banks and loan companies to use to manage risk. OSFI has done plenty of work to make sure that Canadian mortgages, whether with a large bank or credit union or any other type of mortgage lender, are underwritten with strict guidelines. The goal of this regulation is ultimately to protect Canadian consumers.
Some notable examples of where OSFI regulates are:
The guidelines from OSFI eventually end up in all of the lenders underwriting policies in one form or another. We will talk about ‘underwriting’ and what that involves below.
CMHC (Canada Mortgage and Housing Corporation) is a Crown corporation of the Government of Canada. Meaning, CMHC is owned by the government. CMHC is one of three mortgage default insurers in Canada. The other two are Genworth and Canada Guaranty.
Mortgage default insurance is mandatory for federally regulated lenders in Canada when the purchaser of a property has less than 20% of the purchase price for down payment. The insurance covers the lenders losses in the event that the borrower defaults on the loan.
This is important as CMHC and other default insurance providers each have their own guidelines to provide the insurance. They review not only details about the property being purchased and the loan being offered, but also the borrowers income and credit are considered.
If you are using less than 20% down payment, the lender must obtain a default insurance policy before they can complete the loan. Therefore, obtaining the insurance policy is one of the major factors that will determine if the lender decides to approve your mortgage or not.
When you ask the question “How does a lender decide who to give a mortgage to?” - it is the underwriter who works for that lender that ultimately makes the decision. They are real people, saying yes or saying no.
They do follow the guidelines imposed on them by their lenders underwriting policy, but, they also have some ability to work around these guidelines as they see fit.
When an underwriter first receives your application, they do the math. Depending on the mortgage product and the particulars of your application (ie. credit score / down payment etc.) the math can be done differently.
Here is a common example:
The underwriter must determine that the expenses you incur from the property itself do not exceed 39% of your personal household income before taxes. Expenses that are associated with the property include:
Note that number 4 is of particular interest. The mortgage payment that they consider when doing the calculations is higher than the actual mortgage payment that you will be making. This is a relatively new OSFI guideline.
The next step, the underwriter must determine that your total monthly expenses (including the above expenses AND any other obligations you have) do not exceed 44% of your personal income before taxes.
Once the math checks out, the underwriter moves on to review your credit history and any other items that they see fit. This changes substantially for different applicants.
With an ever-changing lending landscape, the best way to determine if YOU are eligible for a mortgage is to reach out to Blink. Our experienced mortgage professionals are available to speak with you today.
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