When you’re self-employed and applying for a mortgage, proving your income can be more complex than for traditional W-2 employees. If you receive income as a partner in a business (reported on a K-1 form from a 1065 or 1120S tax return), we need to verify stability and reliability before considering it for mortgage qualification.
We help self-employed borrowers navigate these requirements with clarity. Here’s what you need to know about using K-1 income for your mortgage application.
When Can K1 Income Be Used?
Fannie Mae requires a 2-year history of receiving Guaranteed Payments to Partners (K1 income) to use it for qualification. But what if you don’t have two years of consistent K1 income?
In that case, we will assess your business’s financial health using one of two key financial ratios to determine if your K1 income can still be considered:
1. Quick Ratio (For Inventory-Based Businesses)
This test is typically used for businesses that rely on inventory to generate income.
Formula:
(Current Assets – Inventory) / Current Liabilities
- A ratio of 1 or higher means your business is financially stable enough to support using the K1 income.
2. Current Ratio (For Non-Inventory Businesses)
This ratio measures liquidity and short-term financial health.
Formula:
Current Assets / Current Liabilities
- Again, a ratio of 1 or higher is considered acceptable to justify using K1 income.
Why Do These Ratios Matter?
We use these calculations to ensure your business has sufficient liquidity to cover its short-term obligations, thereby reducing risk when approving your mortgage. If your business meets the ratio requirements, your K1 income can still be considered, even without a two-year history of guaranteed payments.
Need Help Calculating Your Eligibility?
We specialize in helping self-employed borrowers secure financing. If you’re unsure about your business ratios or how your K1 income impacts your mortgage application, our experts are here to guide you.
Contact us to discuss your options.
