K-1 Income Mortgages in Austin TX — Partners, S-Corp Owners & Pass-Through Borrowers

By Adam Styer, NMLS #513013 · Updated 2026-08-14

A K-1 income mortgage is a conventional, jumbo, or non-QM mortgage where the borrower's qualifying income comes from a Schedule K-1 issued by a partnership (Form 1065) or S-corporation (Form 1120-S). The math runs through Fannie Mae Form 1084, the cash-flow analysis worksheet underwriters use to translate tax-return income into qualifying income. Two variables drive everything: your ownership percentage in the entity, and whether the business has enough liquidity to support paying you.

Who K-1 Borrowers Usually Are in Austin

• Law firm partners — equity partners at Texas firms or AmLaw 100 Austin offices, where ownership stakes typically run under 25%.
• PE and VC partners — general partners, fund principals, and operating partners who receive ordinary income and guaranteed payments through K-1s.
• S-corp founders and owners — Austin tech founders, consulting firm owners, agency principals, medical practice owners — anyone running an LLC taxed as S-corp.
• LLC members — multi-member operating LLCs taxed as partnerships, common across Austin's professional services, holding companies, and real estate operators.
• Family business owners — pass-through entities where the K-1 income looks volatile because of strategic depreciation and retained earnings.

Why so many of these files land in jumbo. The Austin–Round Rock–San Marcos metro median sale price was $435,000 in July 2026 (Unlock MLS), but that's the whole metro. Travis County ran $520,000, and the partner and founder class on this page is not shopping the median — it's West Austin, Tarrytown, Barton Creek, Westlake. The 2026 baseline conforming loan limit is $832,750 (FHFA), so a 20%-down buyer crosses into jumbo somewhere around a $1.04M purchase. K-1 borrowers hit that line constantly — which means the income question and the jumbo question arrive at the same time, and the doc bar goes up on both.

For the broader self-employed picture, start with the self-employed mortgage Austin guide. For pure income-from-the-business-you-own strategy, see mortgage for business owners. This page goes deep on the K-1 specifically — because for partners and S-corp owners, the K-1 page in the tax return is where the entire loan file lives or dies.

Distributions vs Ordinary Income — The Question Every Partner Asks Wrong

The K-1 shows two numbers that look like they should both be income. They are not, and counting them as such is the single most common mistake in K-1 mortgage files.

Ordinary business income (K-1 Line 1)

This is your share of the entity's net profit, taxable to you whether or not you actually received the cash. It is the qualifying income figure underwriters use. If the partnership made $4M in profit and you own 10%, your Line 1 is $400K — taxable on your personal return, used as your starting K-1 income for the mortgage.

Cash distributions

These are the actual cash payments the partnership sent to you during the year. They might be more, less, or the same as your ordinary income. They are NOT additional income — they are how some of your already-counted ordinary income reached your bank account. Counting both would double-count the same money.

Why distributions still matter

Underwriters look at distributions as evidence that the ordinary income is real and accessible to you. Fannie's standard (B3-3.6-07) requires either (a) a documented, stable history of cash distributions consistent with the income being used, OR (b) proof the business has adequate liquidity to support withdrawals. Hit (a) and the guide says no further documentation of access or liquidity is required. If you are reporting $400K of ordinary K-1 income but the partnership has distributed you $0 in cash for two years, the underwriter will want a business-liquidity argument to use the income.

Guaranteed payments (partnership only)

Partnerships use these to compensate partners for services rendered regardless of profit. They show up on K-1 Line 4 (Form 1065). Guaranteed payments are added to qualifying income on top of ordinary K-1 income, with a two-year history. They do not require the liquidity test that ordinary income requires.

Form 1084 Mechanics — What Underwriters Actually Do

Fannie Mae Form 1084 is the cash-flow analysis worksheet that translates partnership and S-corp tax-return income into qualifying mortgage income — the documentation standard behind it lives in Selling Guide B3-3.5-01. Freddie Mac Form 91 is the equivalent. Underwriters work line by line. Knowing what they're doing is the difference between scrambling for documents and arriving with the file already complete. This section applies to 25%-or-more owners; if you're under 25%, B3-3.4-19 above is your path and you can skip it.

The K-1 starting point

• Ordinary business income (K-1 Line 1) × ownership %
• Net rental real estate income (Line 2) × ownership %
• Other net rental income (Line 3) × ownership %
• Guaranteed payments to partner (Line 4 on 1065 K-1)
• Borrower's W-2 wages from the S-corp (if 1120S)

Add-backs from the business return (pro rata at ownership %)

• Depreciation — Line 16a on 1065, Line 14 on 1120S. Non-cash expense, added back.
• Depletion — non-cash, added back.
• Amortization — non-cash, added back.
• Non-recurring casualty losses — added back if clearly one-time.
• Business use of home — added back if the deduction was claimed on the borrower's Schedule.

Adjustments downward

• Meals exclusion — the IRS only allows 50% of meals expense, but actual cash spent is 100%. The other 50% is subtracted from cash flow.
• Mortgages or notes payable in less than one year — treated as current obligations.
• Travel and entertainment exclusions in some cases.
• Capital contributions the borrower made to the business — may be subtracted from cash flow in the year contributed.

The result is "adjusted business cash flow," taken at the borrower's ownership percentage. Two-year average. Lower year if declining. Stacked on top of W-2 wages and guaranteed payments. That total becomes the qualifying income.

When K-1 Borrowers Should Use Non-QM Instead

Agency-eligible K-1 income is the cheapest path when it works. It often doesn't. Non-QM is the right answer when:

• Your business fails the liquidity test — leveraged operating company with thin current assets. Non-QM doesn't require it.
• K-1 income is volatile year over year — large depreciation events, M&A activity, or non-recurring items that distort the two-year average.
• Big depreciation buried ordinary income — real estate operators and equipment-heavy businesses can show low K-1 income on returns. Bank statement loans qualify on deposits and ignore depreciation.
• Significant liquid assets, messy returns — partners and founders sitting on portfolios may qualify cleaner with asset depletion than via Form 1084.
• Trying to close fast — non-QM files run in 25–35 days. Agency K-1 files with business return reviews can stretch to 40–50.
• Privacy on firm financials — many partners physically cannot get the firm's 1065 balance sheet. Non-QM doesn't ask for it.

Non-QM is not a loophole, and you should be suspicious of anyone who sells it that way. "Non-QM" means the loan sits outside the Qualified Mortgage safe harbor. It does not mean the rules stopped applying. The CFPB's Ability-to-Repay rule (12 CFR § 1026.43) still requires the lender to make a reasonable, good-faith determination that you can repay, using verified income or assets. On a K-1 file that verification is your bank deposits or your liquid accounts instead of the firm's balance sheet. Different evidence, same legal standard.

The trade-off is a rate premium. For reference, the Freddie Mac Primary Mortgage Market Survey put the 30-year fixed average at 6.67% the week of August 13, 2026; non-QM programs typically price somewhere above that benchmark, and the exact spread depends on the program, credit, reserves, and loan size. Pricing moves weekly — that figure is a market reference point, not a quote. The right framing for HNW borrowers is rarely "save 50 basis points" — it's "qualify for the right loan amount on the right house." When agency K-1 rules punish a real income picture, non-QM unlocks the deal.

Related Complex-Income Pages

K-1 income is one path. Depending on your full picture, one of these may fit better — or stack with K-1 income on the file:

• Self-Employed Mortgage Austin — broader overview for self-employed Austin borrowers across all program types.
• Bank Statement Loans — when tax returns understate cash flow and the business fails liquidity.
• Non-QM Loans — full Non-QM landscape including bank statement, asset depletion, and ITIN.
• High-Net-Worth Mortgage — private-wealth strategy including pledged-asset and SBL options.
• Asset Depletion Mortgage Texas — qualify on liquid assets, income documentation may not be required on some asset-based programs.
• Mortgage for Business Owners (Austin) — strategy for owners of operating companies, including multi-entity structures.