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When you’re in the market for a new home, securing a mortgage is a critical step. For self-employed individuals, including those who own an S-Corporation (S-Corp), the mortgage application process can be a bit more complex. Understanding how being an S-Corp affects your mortgage prospects is essential for a smooth home-buying experience.
Mortgage Considerations for S-Corp Owners
When you apply for a mortgage as an S-Corp owner, lenders will scrutinize your personal and business finances. Here’s how being an S-Corp might impact the process:
1. Income Verification
For W-2 employees, income verification is straightforward: they provide W-2 forms and pay stubs. S-Corp owners, however, must supply additional documentation, including personal and business tax returns, K-1 statements, and possibly profit and loss statements. Lenders use this information to assess your income stability and the health of your business.
2. Debt-to-Income Ratio (DTI)
Your DTI is a key factor in the mortgage approval process. As an S-Corp owner, you might pay yourself a lower salary to minimize payroll taxes, with the remainder of income reported as a distribution. While this can be tax-efficient, it may inflate your DTI ratio, as lenders typically only consider W-2 income and not business distributions.
3. Cash Flow Analysis
Lenders often conduct a cash flow analysis of your S-Corp to ensure that it generates sufficient income to support your salary and any distributions. They want to see that the business can continue to operate profitably while you service your mortgage.
4. Business Credit
Your S-Corp’s credit profile can indirectly affect your mortgage application. If the business has debt, even if it’s not in your name, lenders may consider how this liability could impact your overall financial situation.
5. Length of Self-Employment
Lenders prefer borrowers with stable, predictable incomes. As an S-Corp owner, you’ll need to demonstrate a history of consistent income. Typically, lenders look for at least two years of successful self-employment.
Advantages of Being an S-Corp
There are some advantages to being an S-Corp owner when applying for a mortgage:
Tips for S-Corp Owners Seeking Mortgages
Contact Us Today
Being an S-Corp owner can complicate the mortgage process, but it doesn’t disqualify you from getting a home loan. With thorough preparation and a strong financial profile, you can navigate the mortgage application process successfully. Whether you are an S-Corp owner or in the process of getting a mortgage, we are happy to guide you through the process and provide what you need to secure the mortgage. Simply contact us below to get started.
Call us today at (833) 829-1120, email us at info@dimovtax.com, or fill out the form and we’ll get in touch immediately.
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