Thanks! Adam will reach out within 1 business day.
NMLS#: 2526130 (Company) · 513013 (Adam Styer)
By Adam Styer, NMLS #513013 · Updated 2026-05-17
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 1120S). 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.
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.
The 25% Ownership Rule — The Single Biggest Variable
Fannie Mae draws a hard line at 25% ownership. Above it, you are treated as self-employed for the entire mortgage file. Below it, the rules are dramatically friendlier — and got friendlier still under a new Fannie Selling Guide section that took effect 2026-03-04.
| Factor | Less than 25% Ownership | 25% or More Ownership |
|---|---|---|
| Treatment | Wage earner (per B3-3.4-19, eff. 03/04/2026) | Self-employed (B3-3.3-07) |
| Primary income source | W-2 wages from the firm (if any) | Form 1084 cash flow from K-1 + business returns |
| Business return required? | Often no | Yes — full 1065 or 1120S |
| Liquidity test? | No | Yes — current ratio ≥1.0 or quick ratio ≥1.0 |
| Documentation burden | Standard wage-earner doc set | Heavy — returns, P&L, balance sheet, sometimes CPA letter |
| Two-year history? | Standard wage-earner rules | Two-year average; lower year if declining |
Why this matters for Austin partners: a law firm partner with a 3% ownership stake who receives a K-1 plus W-2 wages was, until March 2026, often pushed into full self-employed treatment because of the K-1. The new B3-3.4-19 fixes that. For Austin's professional-services partner class — law firms, accounting firms, PE funds, VC firms — this is the most important Fannie rule change in years. Almost no broker pages cover it correctly.
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 (B3-3.3-07) requires either (a) a documented history of cash distributions consistent with the income being used, OR (b) proof the business has adequate liquidity to support withdrawals. 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.
Worked Example — Austin Law Firm Partner
Borrower profile: 42-year-old equity partner at a Texas law firm. 4% ownership. Receives a W-2 from the firm and a K-1 showing his proportional share of partnership income. Looking at a $1.6M home in West Austin, 20% down, 780 credit.
Income Picture
W-2 from firm: $250,000/yr
K-1 ordinary income (Line 1, 4% owner): $400,000/yr
K-1 cash distributions: $250,000/yr
K-1 guaranteed payments: $0
Two-year average: stable (no decline)
Under the old (pre-B3-3.4-19) treatment: 4% ownership + K-1 income often pushed the file into full self-employed underwriting, even though the partner isn't really "running" the business. Form 1084 required, firm's 1065 required, liquidity test on the firm. A solo lender at a big bank would have wanted the firm's balance sheet — which the partner can't produce because firm management treats it as confidential.
Under B3-3.4-19 (effective 2026-03-04, sub-25% ownership): the W-2 wage portion can be treated as standard wage-earner income. The K-1 ordinary income can be added with relaxed self-employment documentation. The full firm return and liquidity test are not required at the same level. Approval path opens for the entire Austin professional-services partner class.
Approximate qualifying income (combined, after Form 1084 add-backs): ~$650K/yr. At 43% DTI, supports the $1.28M loan amount on the $1.6M purchase comfortably. The deal that didn't work as a self-employed file with a big bank works cleanly as a sub-25% wage-earner-plus-K-1 file with the right lender.
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. 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.
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.
The Business Liquidity Test — Where 25%+ Files Get Killed
For 25%+ owners, even with strong K-1 ordinary income, the file fails if the business can't pass the liquidity test. This is where leveraged Austin operating companies — agencies, consulting firms, multi-location businesses with debt — get squeezed.
Current Ratio = Current Assets ÷ Current Liabilities ≥ 1.0
Quick Ratio (for inventory-heavy) = (Current Assets − Inventory) ÷ Current Liabilities ≥ 1.0
Pass either ratio and Fannie allows the K-1 ordinary income to be used. Fail both and the underwriter has to discount or exclude the income entirely. The underlying logic: if your business doesn't have enough current assets to pay its short-term obligations, Fannie doesn't believe the business has the capacity to keep distributing income to you to pay your mortgage.
Common reasons businesses fail the liquidity test
- Heavy receivables financing with line-of-credit balances counted as current liabilities
- SBA debt structured as current portion
- Aggressive retained-earnings strategies leaving the entity cash-poor on paper
- Deferred tax liabilities classified as current
- Seasonal businesses pulling balance sheet on the wrong date
The strategic answer for 25%+ owners whose businesses fail liquidity is usually one of three paths: (1) restructure year-end balance sheet timing, (2) use a CPA-prepared interim statement that passes, or (3) go non-QM (bank statement or asset depletion) and skip the liquidity test entirely.
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.
The trade-off is a rate premium. Non-QM prices above conventional. The right framing for HNW borrowers is rarely "save 50 basis points on the rate" — it's "qualify for the right loan amount on the right house." When agency K-1 punishes a real income picture, non-QM unlocks the deal.
| Borrower Situation | Best Path |
|---|---|
| Law firm partner, <25% ownership, W-2 + K-1 | Agency under B3-3.4-19 |
| S-corp founder, 100% owner, strong liquidity | Agency, full Form 1084 build |
| S-corp owner, leveraged business fails liquidity | Non-QM bank statement |
| Partner with $3M+ liquid, complex K-1 | Asset depletion |
| K-1 income declining 20% YoY | Non-QM or wait for averaging to recover |
K-1 Income Mortgage FAQ — Austin TX
A K-1 income mortgage is a conventional or jumbo mortgage where the borrower's qualifying income comes from a Schedule K-1 issued by a partnership (Form 1065) or S-corporation (Form 1120S). The lender uses Fannie Mae Form 1084 to convert tax-return income, add-backs, and distributions into qualifying cash flow. This is agency-eligible, not non-QM, when properly documented.
If your ownership in the partnership or S-corp is 25% or more, Fannie treats you as self-employed. That triggers full Form 1084 cash flow analysis, business return review, and a liquidity test. Under 25%, the new Fannie Selling Guide B3-3.4-19 (effective 2026-03-04) lets you qualify primarily on wage income with relaxed self-employment documentation. Huge difference.
The lender uses your share of ordinary business income — not the distribution amount — as the starting point for qualifying income. Distributions are evidence the income is real and accessible, which the underwriter wants to see. Counting both would double-count the same money. The exception is guaranteed payments to partners, which are added separately.
When you own 25%+ of a partnership or S-corp, Fannie wants proof the business has enough current assets to support paying you the income you are using to qualify. The standard test is a current ratio of 1.0 or higher (current assets divided by current liabilities) or a quick ratio of 1.0 or higher for inventory-heavy businesses. Failed liquidity kills the income.
Law firm partners typically own less than 25% of the firm, which means the new Fannie B3-3.4-19 (effective March 2026) governs. You can qualify primarily on W-2 wages from the firm with relaxed self-employment documentation. For equity partners with 25%+ stakes, Form 1084 applies and the firm's books get reviewed. Guaranteed payments add on top with a two-year history.
Declining income triggers heightened review. Fannie's general convention is that a year-over-year drop greater than roughly 5% requires the lender to use the lower of the two years and document a credible explanation. If the trend is sustained, the lower year is the qualifying number. A one-year anomaly can be explained around. Two years of decline is harder.
Common add-backs include depreciation, depletion, amortization, and non-recurring casualty losses, all taken at your ownership percentage. Business meals get a downward adjustment (50% of meals expense is added back since the IRS only allows half). Mortgages or notes payable in less than one year are subtracted as obligations. The full mechanics live in the form itself.
Common for law firm partners and S-corp owners. Both income streams can be used. For S-corp owners, your W-2 from the company is part of your total cash flow analysis on Form 1084. For partnerships, W-2 wages are unusual (partners typically don't receive W-2s) but guaranteed payments serve the same function and add on top of ordinary K-1 income.
Non-QM (bank statement or asset depletion) often wins when your business fails the liquidity test, your K-1 income is volatile year over year, you took big depreciation that buried ordinary income, or you have significant liquid assets but messy returns. Agency at 25%+ ownership punishes leveraged operating companies. Non-QM costs a rate premium but unlocks the right loan amount.
Standard rule is two years of personal returns including K-1s, plus two years of the business return (1065 or 1120S). One year is possible at some lenders when the income is stable, well-documented, and supported by a strong borrower profile. The two-year average is the default qualifying figure, with the lower year used when income is declining.
Two years of personal federal tax returns including all K-1s. Two years of the business return (Form 1065 for partnerships, Form 1120S for S-corps). Year-to-date business profit and loss. Current balance sheet for the business if 25%+ ownership. Government ID, asset statements, the appraisal, and the purchase contract. If under 25% ownership, the business return requirement often eases.
Yes — K-1 income qualifies for conventional jumbo, second home, and investment property loans the same way W-2 income does. For pure investment plays, a DSCR loan may be cleaner because it qualifies on the rental property's cash flow and skips personal income. We'll model both. See the investor loan guide for the comparison.
Quick Answers About K-1 Income Mortgages
Can K-1 income be used for a mortgage?
Yes. K-1 income may be used when the borrower can document ownership, access to income, business stability, and enough historical income to meet the loan program's requirements.
Why does K-1 income get complicated?
K-1 income can include distributions, retained earnings, add-backs, partnership debt, and business liquidity tests. The underwriter needs to know whether the income is usable, recurring, and accessible to the borrower.
What if the business keeps profits inside the company?
Retained earnings may or may not help, depending on ownership percentage, access, liquidity, and program guidelines. Adam reviews K-1s, business returns, and the borrower profile before assuming the income works.
Reviewed by Adam Styer, NMLS #513013. Adam is licensed in Texas through Mortgage Solutions LP, NMLS #2526130. This page is educational and is not a commitment to lend.
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.
Run Your K-1 Numbers
Send me your last two K-1s and I'll tell you what loan amount you actually qualify for — Form 1084 math, sub-25% path, or non-QM if agency falls short.
Review My K-1 Income Book a 15-Minute Call →Or call (512) 956-6010 — NMLS #513013