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A Beginner’s Guide to Self-Employed Mortgages in British Columbia

Ever thought about ditching the nine-to-five grind and setting up shop on your own? It’s a liberating thought, isn’t it? Being your own boss, setting your own hours, and chasing your own dreams. But, when it comes to applying for a mortgage, being self-employed can feel like you’re trying to navigate a labyrinth in the dark. It’s tricky, it’s confusing, and sometimes it feels like you’re going in circles. 

Don’t worry, because we’re here to shed some light on the subject. This guide is designed to help you unravel the complexities of self-employed mortgages and provide you with the information you need to stride into that bank or lender’s office confidently. Whether you’re a freelancer, contractor, small business owner, or part of the growing gig economy in British Columbia (BC), this guide is for you. 

We understand that your income might not be as predictable as someone with a traditional job, but that shouldn’t stop you from owning your dream home. So, let’s dive in and take the mystery out of self-employed mortgages, one step at a time. Together, we can turn the dream of homeownership into a reality.

Eligibility Criteria for Self-Employed Mortgages in British Columbia

When it comes to self-employed mortgages in BC, lenders will often assess your eligibility based on certain criteria that focus on your financial stability and your ability to repay the mortgage in the long run. Understanding these criteria will help you plan and prepare before submitting a mortgage application. Some of the critical factors lenders consider include:

  1. Type of Self-Employment: There are multiple ways to be self-employed, such as being an independent contractor, owning a sole proprietorship, or operating within a partnership or corporation. Explaining your business structure to potential lenders is vital, as it can affect how your income is calculated and assessed.
  2. Proof of Income: One of the primary challenges for self-employed individuals seeking a mortgage is providing proof of income, as their income may be less predictable than someone with a salaried position.
    Instead of the traditional T4 slips provided by employers, you will need to provide business financial statements for the past two to three years. Additionally, lenders may also require your Notice of Assessment (NOA) from the Canada Revenue Agency, which shows your taxable income. Lenders may also require other income documentation to verify your income consistency and growth. 
  3. Credit Score: A high credit score is a significant asset when applying for any mortgage, even more so for self-employed borrowers. A strong credit score indicates a responsible borrower with a history of repaying debts on time, mitigating the lender’s perceived risk associated with self-employed individuals.
  4. Debt Service Ratios: Lenders use two significant debt service ratios to assess a borrower’s ability to repay a mortgage: the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio. Maintaining low outstanding debt and ensuring your potential mortgage payments are manageable relative to your overall debt obligations will improve your chances of securing a self-employed mortgage.

Documentation Requirements for a Self-Employed Mortgage

While the documentation requirements for self-employed mortgages may seem extensive compared to those for regular mortgages, gathering and organising these documents in advance can streamline the mortgage application process. Be prepared to provide the following information to potential lenders:

  1. Notices of Assessment: Lenders will typically ask for up to two years of notices of assessment to verify your annual income and that you have paid your taxes on time.
  2. Business Financial Statements: Self-employed individuals may be required to provide two years of professionally prepared financial statements, including balance sheets and profit and loss documents. These statements help lenders understand the financial health of your business better.
  3. Personal Tax Returns: Lenders may also request up to two years of personal tax returns, which can offer additional insight into your overall financial situation.
  4. Business Licences and Registration: Proof of your valid business registration and any licences or permits required for your specific industry can further validate your self-employment status to lenders.

Securing a Mortgage: Options for Self-Employed Borrowers

With various mortgage financing options available, identifying the most suitable solution for your unique needs is crucial as a self-employed borrower. Some common mortgage types to consider include:

  1. Conventional Mortgages: Obtaining a conventional mortgage from a bank or credit union is possible for self-employed individuals who can provide extensive income documentation and meet other strict eligibility requirements. In some cases, it might be more difficult, but shopping around different lenders can help you find the best fit.
  2. Alternative Financing: Some lenders offer mortgage products specifically designed for self-employed borrowers who may not qualify for a traditional mortgage. These alternative options usually have slightly higher interest rates and may come with additional fees but can provide a viable solution for borrowers with variable income or unconventional documentation.
  3. Private Mortgage Loans: For self-employed individuals with unique financing needs or those having trouble qualifying for other mortgage types, private mortgages can present a viable option. They typically come with higher interest rates and shorter terms; however, they can be customised to accommodate your specific financial situation.

Tips for Boosting Your Mortgage Approval Odds

Here are some useful tips to increase your chances of securing a self-employed mortgage:

  1. Maintain a Healthy Credit Score: Keep your credit score in top shape by paying bills on time, minimising your credit use, and avoiding taking on new debt.
  2. Limit Business Expenses: Streamline your business expenses to maximise your income, as lenders will assess your mortgage affordability based on your net income before taxes.
  3. Organize Your Documentation: Being proactive in gathering and organising all required documents will demonstrate your preparedness and commitment to potential lenders.
  4. Consult a Mortgage Broker: A professional mortgage broker can help navigate your options and find a mortgage solution tailored to your specific needs.

The ABCs of Mortgages for Self-Employed Individuals in BC

The path to homeownership as a self-employed individual can be more complex than for salaried borrowers; however, with a clear understanding of the requirements, available financing options, and informed planning, you can successfully secure a self-employed mortgage. 

Best Rates BC is here to guide and support you through the entire process, offering expert advice, and personalized solutions, and advocating for you every step of the way. Contact our team to discuss your mortgage needs and begin your journey towards homeownership today with our competitive mortgage rates in BC!

By Best Rates Mortgages | November 24th 2023
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