By Justin Pierce (JP) | Branch Manager / Certified Mortgage Advisor
Gold Star Mortgage Financial Group | October 26, 2026The October 15 extension deadline has passed for most people filing 2025 federal tax returns. If you own part of a partnership, LLC, or S corporation, your new return may include a Schedule K-1 showing a healthy share of business income. That number can matter for a mortgage, but it is not the whole answer. [1]
Quick answer: K-1 income may be used to qualify when it is stable and properly documented. Depending on your ownership share and loan program, the lender may also need to verify that the income was distributed to you or that the business has enough liquidity to support a withdrawal. A K-1 records taxable activity. It does not always show how much cash reached your personal account. [2, 3, 4, 5]
Taxable income and available cash are different
Pass-through businesses generally report each owner’s share of income or loss on Schedule K-1. The business may keep some of that money for payroll, inventory, equipment, taxes, or working capital. You can therefore owe tax on income that stayed inside the company.
That distinction explains why a lender may ask for more than the K-1. Fannie Mae says business income reported on an individual return may not have been distributed to the borrower. Its self-employment analysis is designed to identify income the borrower can rely on without weakening the business that produces it. [3]
The lender may review distributions or business liquidity
For partnership and S corporation income, Fannie Mae allows K-1 income in the cash-flow analysis when the file supports access to the earnings. A stable history of cash distributions that is consistent with the income being used can satisfy that question. Without that history, the lender may evaluate whether the business has adequate liquidity. [2]
Liquidity means the business has enough readily available resources to meet near-term obligations. The guide gives current ratio and quick ratio as examples, while allowing lenders to document another reasonable method. This is not a request to empty the business account. It is an analysis of whether personal withdrawals can occur without creating a cash shortage. [2]
Freddie Mac takes a similar approach. Its current self-employed income guidance says cash distributions reported on Schedule K-1 are not themselves qualifying income, but they may help establish business liquidity. The lender still calculates stable monthly income from the applicable tax-return analysis. [5]
Ownership percentage changes the review
Fannie Mae considers someone self-employed when the person owns 25% or more of a business. Those borrowers generally face a full self-employment review. A borrower with less than 25% ownership has a separate K-1 income section, but income still must have been distributed or be supported by adequate business liquidity. The current section is dated October 7, 2026. [3, 4]
Your ownership percentage, business structure, tax forms, and automated underwriting findings determine which documents apply. Lender and investor requirements may add conditions. No single K-1 number guarantees the qualifying result.
Prepare the story behind the number
Before shopping, gather complete personal returns with every K-1, the related business returns if required, and records showing your distribution history. A current profit-and-loss statement, balance sheet, or recent business bank statements may also be requested when the lender needs a current view of income or liquidity. [2, 3]
Do not increase owner draws solely to make the file look stronger. Large withdrawals can reduce the liquidity the lender is reviewing. The better first step is to have a mortgage advisor map each income source to the correct guideline, then identify any missing documents before you rely on that income in a purchase budget.
Your K 1 is the start of the analysis
A profitable K-1 is useful evidence. The lender still has to connect taxable income, actual distributions, business strength, and the applicable loan rules. Reviewing that connection early can produce a more realistic price range and fewer surprises after an offer is accepted.
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Does your business usually distribute most of its profit, or keep more cash in the company for growth? Share the general approach in the comments without including private financial details.
Sources for the article[1] IRS Tax Tip 2026 74 The Deadline to File 2025 Taxes Is Tomorrow Published October 14, 2026; confirms the October 15, 2026 deadline for most extension filers.[2] Fannie Mae Selling Guide B3 3.6 07 Schedule K 1 Income Topic dated May 7, 2025; accessed October 26, 2026.[3] Fannie Mae Selling Guide B3 3.5 01 Self Employed Borrowers Topic dated December 13, 2023; accessed October 26, 2026.[4] Fannie Mae Selling Guide B3 3.4 19 Schedule K 1 Income Under 25 Percent Ownership Topic dated October 7, 2026; accessed October 26, 2026.[5] Freddie Mac Guide Section 5304.1 Self Employed Income Section updated June 3, 2026; accessed October 26, 2026.