W-2 vs Non W-2 Conventional Loan Financing

[Ian Sara]

Hey All,

Is someone able to highlight the main differences or challenges between financing an investment property with a conventional loan with W-2 income vs non W-2?  My wife owns her own business but is technically a W-2 employee based on how we have the business entity structured, however, we were looking into changing that after this tax year to a sole proprietor where she wouldn't be a W-2 employee any longer.  Will this make qualifying for conventional financing a lot more complicated, or if we can show that she consistently pays herself with distributions every two weeks like a W-2 employee would will that ease any troubles that come with being self employed?

Thanks!

[Ian Sara]

Quote from @Eric Veronica:

If you own more than 25% of an S-corporation then you are considered self employed.  As a self employed person, whether or not you pay yourself a W-2 or not doesnt usually matter.  The overall calculation of the business income is what matters.  Assume a scenario  you own 100% of the business.  

Scenario 1 - business net income is 100k per year and you pay yourself no W-2

Scenario 2 - business net income is 50k and you pay yourself a 50k W-2 salary

Scenario 3 - business breaks even and there is no net income and you pay yourself 100k W-2 Salary

In each scenario your annual income is 100k.  It does not matter a how you slice it. (NOTE there are some additional additions and subtractions that go into calculating self employed income.  Also the calculation changes if you own less than 100% of the business)

Overall switching to a sole proprietor/schedule C business should not change anything.  At the end of the day the cash flow analysis calculation is almost exactly the same for an S-Corp vs to a schedule C/sole proprietor.  You do not need to show consistent distribution history because if your are self-employed because the tax returns will tell the story.  

Thanks Eric, this is very helpful and makes sense.  As you stated, tax returns will tell the story regardless.