As was already said, there is no such thing as an FHA loan in Canada. It is in the US that you can get an FHA loan. In Canada, on the other hand, CMHC-backed mortgages are like FHA loans. Both help people get mortgages even if they have bad credit or a small down payment.
An FHA home loan is a type of mortgage that is given by a lender that has been approved by the Federal Housing Administration (FHA), which is a US federal government office. It’s easier to get these home loans than conventional loans because the requirements for lending are less strict. For example, the down payment and credit score standards are lower.
For this reason, FHA loans are popular among first-time homebuyers and borrowers with low credit scores.While an FHA home loan may be easier to qualify for, it costs money. Borrowers who take out an FHA mortgage must pay an upfront mortgage insurance premium (MIP). While borrowers pay the premiums, the insurance policy actually protects the lender in case of mortgage default.
In addition to the upfront costs made at the time of closing, borrowers must also pay an annual insurance premium that can be divided into 12 monthly payments. The insurance premium depends on the loan amount and down payment.
What Is The FHA?
The Federal Housing Administration (FHA) is a US government agency that was formed by President Franklin Roosevelt in 1934. At the time, the housing business in the US was very weak. Mortgage terms were extremely difficult for homebuyers to meet, leaving most Americans unable to buy a house.
The FHA’s main job is to insure mortgages in an effort to lower the barrier to mortgage approval and homeownership. By insuring mortgages, approved lenders can give loans to bad credit borrowers who may be unable to secure a traditional mortgage.
The FHA offers various home loan programs, including the following:
- FHA 203(b) program. This is the most common FHA loan among homebuyers, especially first-timers.
- FHA 203(k) repair loan. This loan is designed for borrowers who want to buy or refinance a home that needs renovations.
- FHA Energy Efficient Mortgage (EEM) program. This loan is meant to help borrowers buy or refinance an energy-efficient home.
FHA Loan vs. A CMHC Mortgage:
In Canada, the FHA is similar to the Canada Mortgage and Housing Corporation (CMHC). Similar to the FHA, the CMHC insures mortgages, especially high-ratio mortgages, which are mortgage loans with a loan-to-value ratio higher than 80%. Down payments of less than 20% of the selling price of a home must be insured by the CMHC.
CMHC-backed mortgages allow homebuyers to purchase homes with very low down payments. In Canada, you can make a down payment as low as 5% of the property’s buy price. This makes it easier to receive a home loan.
However, CMHC protection comes with a cost, as is the case with FHA loans. Borrowers who take out a CMHC-backed home loan must pay insurance premiums, which can be paid in one lump sum or rolled into mortgage payments for the length of the loan term.
The exact cost of the premium is based on the down payment amount and runs anywhere from 0.60% to 4.0% of the total loan amount. The final estimate is made when you apply for a mortgage.
FHA Loan Requirements:
Qualifying for an FHA loan may be easier than a conventional mortgage, but there are still requirements to be met, including the following:
Minimum Credit Score:
You must have a credit score of no less than 580 to get approved for an FHA loan with a down payment of 3.5%. If your score is under 580, your down payment must be at least 10% to qualify for an FHA loan.
Debt Limits:
FHA lenders will look at your debt-to-income ratio, which measures your debt related to your monthly income. The FHA’s guidelines state that debt-to-income ratios must be no higher than 43%, generally speaking. This includes all family debt, including housing costs.
CMHC Requirements:
To lower the risk for the borrower and lender, there are certain requirements that must be met for CMHC-insured loan approval:
Minimum Credit Score:
The target property must also meet minimum property standards to be financed by an FHA loan. Namely, the home should be safe for occupancy and have no physical defects that could risk the structure’s integrity. Further, the home must be the borrower’s main residence.The CMHC demands that at least one borrower has a minimum credit score of 600.
Debt Limits:
The CMHC will also look at your debt-to-income relationship. More specifically, CMHC needs a Gross Debt Service (GDS) ratio of no more than 39% and a Total Debt Service (TDS) ratio of no more than 44%. Your GDS refers to the amount of your monthly income that goes toward your housing costs. Your TDS refers to the share of your monthly income that covers your housing bills and all other debts.
Property Requirements:
The maximum purchase price of the home must be under $1 million, with an amortization term of no longer than 25 years.
Both the FHA loan in the US and the CMHC mortgage in Canada are meant to help borrowers who otherwise would have trouble getting approved for a conventional loan. These organizations offer programs to help buyers with lower down payments. One of the biggest barriers to getting into the housing market in both Canada and the U.S.
Is there an FHA loan in Canada?
No, there are no FHA loan in Canada. These loans are only given in the US. The equal to FHA loans in Canada is the CMHC-insured mortgage, which comes with lower credit score and down payment requirements compared to conventional mortgages.
What is the FHA 203(k) loan in Canada?
The FHA 203(k) loan is offered to homeowners in the US who want to finance the purchase and renovation of a property. It is not sold in Canada. The counterpart to an FHA 203(k) loan in Canada is the CMHC Improvement Mortgage, which helps homeowners fund upgrades made to a newly bought home.
What is the difference between FHA mortgages and standard mortgages?
FHA loans are protected by the FHA and are only offered by FHA-approved lenders in the US. They come with lower credit and down payment standards and require insurance premium payments. Conventional loans, on the other hand, are not backed by the government. As such the credit score and down payment standards are higher, and there are no insurance premiums payable.
How do mortgages operate in the U.S. for Canadian citizens?
It is not uncommon for Canadian citizens living and working in the United States to want to own real estate in the country. In fact, for many U.S. citizens, residents and even nonimmigrants, owning a home is one of the key aspects of the American dream. The good news is that it is indeed possible for Canadian citizens to join the real estate market and qualify for U.S. mortgage loans since eligibility is not based on citizenship or residency, but income. That means as long as one has a taxable income in the United States, he or she can apply for a home loan.
With that in mind, it is important to note that buying a home, whether a vacation home or a rental property, can present certain hurdles for non-U.S. citizens. For instance, non-permanent residents are only qualified for Federal Housing Administration (FHA) and other government-backed loans under very strict terms, and so may often have to resort to more traditional lenders. Let’s take a look at how U.S. mortgages work and how Canadian citizens can gain them.
Home Ownership and Residency Status
The requirements for getting a mortgage loan largely relies on the applicant’s residency status. As a Canadian citizen, you’ll likely fall within one of the following groups:
Permanent residents with a valid green card — This group can obtain U.S. mortgages just like everyone else. They’re even qualified for FHA loans and other notable mortgage lenders like Fannie Mae and Freddie Mac home loans. Applicants will need their green cards and social security numbers.
Non-permanent residents with a legal work visa — If you fall in this group, then you don’t have a green card, but likely have a social security number. You can take out a mortgage if you show an Employment Authorization Document (work permit) or an employer-sponsored visa, like the L-1 and H-1B visas. Lenders will also have to check whether you’ll continue living and working in the U.S. for the next couple of years.
“Foreign nationals,” who primarily live outside the U.S. — It’s quite harder for people in this group to finance their second home in the United States since they are riskier for lenders. Banks and dealers have to keep these loans on their own books so they typically carry higher interest rates and require much larger down payments. However, there are private lenders who offer these mortgages to foreign people.
Refugees or foreigners given asylum — People in this category may receive mortgage financing like a lawful resident alien, provided they can prove their refugee or asylee status.
