Understanding S Corp Pass-Through Income for Securing a Personal Mortgage

In the complex world of mortgages and income verification, individuals earning through different business structures often face uncertainty. As a sole proprietor of an LLC taxed as an S Corporation, one might wonder how their income is assessed by mortgage lenders, especially when it comprises both salary and distributions.

The Basics of S Corporation Income

For those navigating the realms of real estate and construction, like myself, setting an attractive income goal for the year is essential. This year, my objective is to earn approximately $150,000. Considering the standard in my region, a reasonable salary would be $55,000, leaving the rest to be allocated as distributions.

The Income Structure

The plan is to draw a salary of $55,000 and to receive $95,000 through distributions. This bifurcation is standard practice for an LLC taxed as an S Corporation, but it raises a crucial question: When applying for a personal mortgage next year, how will lenders view these distinct income streams?

Mortgage Lenders and Income Consideration

Mortgage lenders traditionally scrutinize an individual’s income to determine their lending risk and capacity to repay. The question arises whether they will consider the total $150,000 ($55,000 in salary plus $95,000 in distributions) or merely the salary portion when evaluating a mortgage application.

What to Expect

Some lenders may only consider the $55,000 base salary as verifiable income. However, that’s not always the case, as many lenders recognize distributions as part of the borrower’s total income. It is essential to have clear records and documentation showing the full picture of your earnings to ensure that both salary and distributions are acknowledged in the mortgage assessment process.

Conclusion

For those in similar situations, it’s crucial to discuss with potential lenders or financial advisors about how both salary and distributions can impact your mortgage eligibility. Understanding their criteria will help better prepare for the application process and ensure that all aspects of income are accounted for.

Navigating the mortgage process with an income derived from an S Corporation structure requires insight and proactive planning. By having open discussions with financial experts, individuals can optimize their standing when seeking to secure a mortgage, reflecting their true financial capacity.