S-corp consultant · 3 yrs · 760 · conventional
| Borrower | S-corp management consultant |
| Self-employed | 3 years |
| Credit | 760 |
| Program | Conventional 30-year fixed |
| Price | $640,000 (illustrative) |
| Down payment | 25% |
| State | IL |
| Outcome | Approved |
The scenario
This consultant ran their practice as an S-corp, paying themselves a $90,000 W-2 salary and taking the remaining profit as K-1 distributions. Many borrowers in this position assume only the W-2 counts — and undersell themselves. In fact, the lender added the W-2 wages (at 100%) to their share of the business's adjusted income from the 1120-S.
With three years of stable returns, a 760 score, and 25% down, a conventional loan was the cheapest option available. The qualifying income combined salary and K-1 ordinary income plus add-backs, which comfortably supported a $640,000 purchase. The lender did verify business liquidity before counting the K-1 income.
What made it work
- W-2 wages counted at 100%, on top of K-1 business income
- Three years of stable, rising returns supported averaging
- Business showed a current ratio above 1.0 (liquidity test passed)
- 760 score and 25% down delivered the best conventional pricing
Lessons you can use
S-corp income is W-2 plus K-1, not either/or
The qualifying income was the salary plus the borrower's ownership share of the business's adjusted cash flow (ordinary income plus depreciation and other add-backs). Counting only the W-2 — a common mistake — would have understated income badly and shrunk the approved loan.
The liquidity test is real
Before counting K-1 income that wasn't fully distributed as cash, the lender checked that the business could actually pay it out — typically a current or quick ratio of at least 1.0. Borrowers who leave large retained earnings in the business sometimes have to show distributions history instead. Knowing this in advance avoids a late-stage surprise.
Stable, rising income unlocked averaging
Because income grew year over year, the lender averaged the two most recent years rather than using the lower one. A consistent upward trend is one of the strongest things a self-employed borrower can show; it's the difference between qualifying on an average and qualifying on your worst recent year.
Your next step
If this scenario rhymes with your situation, start with The self-employed mortgage guide for the full picture, then run your own numbers with the Self-employed income calculator. Every real application is different — use these scenarios to learn the patterns, then confirm specifics with a licensed loan officer.
This profile is a composite educational scenario created by Mortgage Merlin editorial staff — not a real person, transaction, or testimonial. Figures are illustrative and not a quote, pre-approval, or offer of credit. Mortgage Merlin is a publisher, not a lender or broker.