When you hire yourself and apply for a mortgage, it is more complicated to prove that your income is more complicated than a traditional W-2 employee. If you receive income from your business partner (form K-1 reported from tax returns from 1065 or 1120s), we need to verify stability and reliability before considering mortgage eligibility.
us Help self-employed borrowers to browse these requirements clearly. Here are the K-1 income you need to know about mortgage applications.
When can I use K1 revenue?
Fannie Mae needs to receive a guaranteed payment for its partner (K1 income) for qualifying. But what if you don’t have two years of consistent K1 income?
In this case, we will use one of two key financial ratios to evaluate your business’s financial position to determine if your K1 revenue can still be considered:
1. Fast ratio (for inventory-based businesses)
This test is often used for businesses that rely on inventory to generate revenue.
formula:
(Current Assets – Inventory) / Current Liabilities
- A ratio of 1 or higher means your business is financially stable enough to be supported using K1 revenue.
2. Current ratio (for non-residential business)
This ratio measures liquidity and short-term financial health.
formula:
Current assets/current liabilities
- Likewise, using a ratio of K1 revenue ratio of 1 or higher is acceptable.
Why are these ratios important?
We use these calculations to ensure your business has sufficient liquidity to assume its short-term obligations, thus reducing risk when approving mortgages. If your business meets the ratio requirements, your K1 revenue can still be considered even if there is no history of guaranteed payments for two years.
Need help calculating your qualifications?
We specialize in helping self-employed borrowers obtain financing. If you are unsure about how your business ratio or K1 revenue affects your mortgage application, our experts will be here to guide you.
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