Lenders look at wages and business earnings separately

If you own at least 25% of the business, Fannie Mae treats you as self-employed. Even if your S corporation issues you a W-2, the lender can need to look at the business that pays those wages. It evaluates whether earnings are stable, how much of the business income or loss belongs to you, and whether that income is available to support the mortgage.

What each record tells the lender

  • W-2 wages show compensation paid through payroll.
  • Schedule K-1 reports your share of applicable business income or loss. It can also show distributions.
  • Distributions can document cash you received. A stable distribution history consistent with the income used can help document access. When distributions do not establish access, the lender may need to verify that the company has sufficient liquidity to support withdrawals.

Worked example

Say your W-2 shows $60,000 in wages, your K-1 shows $40,000 of ordinary business income, and your company distributed $30,000 to you. When the distributions represent cash taken from the same earnings already under review, adding all three figures would count those dollars twice. If the lender's review supports the $60,000 in wages and the full $40,000 in eligible business income, the illustrative total is $100,000 a year, or about $8,333 per month. The lender still needs to verify access to the amount used, and adjustments, income trends, or company losses can change the result.

What to bring

Prepare recent personal returns, applicable Form 1120-S returns and K-1s, W-2s, current payroll records, and proof of ownership. If distributions vary or the company keeps most of its profits, ask what evidence the lender needs to assess liquidity. If you also plan to use company cash at closing, read the business-owner reserves guide. The self-employed income guide explains how the review differs for other business structures.

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