"I Own Less Than 25% of My Firm. Does My Schedule K-1 Make Me Self-Employed on a Mortgage?"

No. If you own less than 25% of a partnership, S corporation or LLC, the Fannie Mae Selling Guide reads your Schedule K-1 as income rather than as self-employment. The documents are two years of your signed personal federal income tax returns with the K-1s. Your guaranteed payments can be added to that income, and the lender is not required to analyze the viability of your firm.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, NMLS #483943, through C2 Financial Corporation.

If you are a recently admitted partner, a junior partner with a small share, or a member of a group practice, you have probably been handed a self-employed document list at some point. It asks for the firm's complete business tax returns, a year-to-date profit and loss statement, and the firm's bank statements. You may not have access to any of that, and under 25% ownership you usually do not owe it.

Where does the 25% line come from?

The rule is Fannie Mae Selling Guide B3-3.4-19, Schedule K-1 Income <25% Ownership, revised 03/04/2026 under Announcement SEL-2026-02. Its opening sentence says the table that follows applies to a client who has less than 25% ownership of a partnership, S corporation or limited liability company. It sends anyone above the line to Selling Guide B3-3.5-01, revised 12/13/2023, the section written for the person who runs the business.

Freddie Mac draws the same line from the other direction. Section 5304.1, revised 06/03/2026, says that a client with an ownership interest of 25% or more in a partnership, S corporation or corporation is considered self-employed. It adds that when a client has ownership in one or more businesses but none of them reaches 25%, the lender can use the employed-income rules in Section 5303.1 instead.

So the line is about how much of the business you own. It has nothing to do with your title, or with the fact that your pay arrives on a K-1 instead of a W-2. A partner with 3% of a two-hundred-lawyer firm and a partner with 40% of a three-person firm receive the same form from the IRS, and underwriting reads them two different ways.

The owner file I wrote about in how an S-corp owner's salary and distributions are read is built on the business returns and on a cash-flow analysis of the company itself. Your file, at under 25%, is built on your personal returns and on what the K-1 shows you received.

What documents does a partner under 25% actually provide?

The Fannie Mae section lists them in one row. The lender collects the most recent two years of your signed personal federal income tax returns and your IRS Schedule K-1s. When the K-1 reports rental income only, the lender collects one year of signed personal returns and the K-1.

So when you are ready, please provide your complete personal federal income tax returns for the past two years, all pages and schedules, please, including every Schedule K-1 that came with them. Underwriting reads the K-1 for three things: your share of the ordinary income, the guaranteed payments to you as a partner, and the distributions you received. Your K-1 also shows your ownership share on its face, which is how the file proves you are under the line. Freddie Mac's Section 5304.1 says the percentage is verified from the business returns, including the K-1s, or from an accountant's letter if those do not show it.

Freddie Mac's employed-income section adds two small items: documentation of your year-to-date income where it is available, such as a current pay statement, and verification that the business currently exists.

That is the whole list. The firm's Form 1065 or 1120-S, its profit and loss statement and its bank statements belong to the self-employed file, where a lender studies a business that a client controls. A lender who asks for them at 4% ownership is applying the wrong section.

How does the lender decide how much of my K-1 counts?

The K-1 shows income you were taxed on whether or not the money ever reached your account. The Fannie Mae section says income reported on Schedule K-1 can only be considered if the lender documents one of two things. Either the income was actually distributed to you and is consistent with the level of business income being used to qualify, or the business has adequate liquidity to support the withdrawal of earnings.

The underwriter wants to see that the share of profit on your K-1 is money you can actually spend. The simplest proof is the distributions line on the same K-1. If your share of ordinary income was $30,000 and the firm distributed $29,000 to you, the income counts. If the firm distributed nothing, the lender looks at whether the firm has enough cash on hand that it could have paid you. Freddie Mac's Section 5303.1 says it the same way: when ordinary business income is used to qualify, the historical cash distributions must be reasonably consistent with the ordinary business income reported on the K-1s.

The Fannie Mae section also says two more things about how the number is read. The lender is not required to analyze the viability of the business the way it would for a self-employed client. The lender may also only use your proportionate share of the earnings reflected on the K-1, so the figure in your file is your share of the firm and no more.

Do guaranteed payments count as income?

Yes. For a lot of partners, guaranteed payments are the main line on the K-1. They are the fixed compensation the partnership pays you for your services, the closest thing a partner has to a salary.

The Fannie Mae section says that if you have a two-year history of receiving guaranteed payments to the partner from a partnership or an LLC, those payments can be added to your cash flow. Freddie Mac's Section 5303.1 lists guaranteed payments for services alongside ordinary income as K-1 income it accepts, with a two-year history of receipt for each.

Fannie Mae also wrote an exception for the newly admitted partner. It says the two-year requirement for guaranteed payments does not apply to a client who recently acquired nominal ownership in a professional services partnership after an established employment history with that partnership. The guide's own examples are a medical practice and a law firm. In that situation the lender may rely on your guaranteed compensation, evidenced by your partnership agreement and supported by your current year-to-date income.

Freddie Mac has a version of the same relief. A shorter history of guaranteed payments may still be considered stable when the lender writes an analysis, with supporting documentation, justifying it. Its example is an employee of the same firm who recently became a partner with a nominal ownership interest, and it requires at least 12 months of receipt.

So if you spent six years as an associate and were admitted to the partnership last January, those employee years do not disappear from your file. They are the established employment history the exception is built on. When you are ready, please provide your complete, signed partnership agreement, all pages and any amendments, and the most recent year-to-date compensation statement the firm has issued. We will also need the W-2s from your associate years, because they show the employment history that led up to your admission.

Do I need two years, and does the lender check that it will continue?

The section asks for a minimum two-year history of the income, the same window underwriting applies to most pay, and why lenders want two years of everything explains the reasoning. The guaranteed-payment exception above is the one written exception for a partner whose two years are not there yet.

Continuance is the question of whether the income will keep coming. The lender is not required to verify that the income will continue unless it has reason to believe the income may not continue. A K-1 that lines up with your distributions and a year-to-date statement that tracks last year will generally settle that question on their own. If the firm is dissolving, or your K-1 shows a sharp drop the year-to-date figures confirm, the lender will ask.

The steps, in the order I would take them

1. Please check your most recent Schedule K-1 for your ownership share. That one number decides which section of the guide your file is read under.
2. Please provide your complete personal federal income tax returns for the past two years, all pages and schedules, please, with every K-1 attached. If you receive K-1s from more than one business, please include all of them, because the rule looks at each business separately.
3. You'll want to compare the distributions line on each K-1 against your share of ordinary income. If the firm retained your share, it helps to know that before underwriting asks, so the liquidity question can be answered early.
4. If you were admitted recently, please gather your complete, signed partnership agreement, all pages and any amendments, and the most recent year-to-date compensation statement the firm has issued. Those are the two documents the exception depends on, and the W-2s from your associate years show the history behind it.
5. You can run your income and debts through the debt ratio tool before anyone pulls credit, and see the payment that number supports for you.

Where this goes wrong

The first way it goes wrong is that the wrong document list goes out. A loan officer sees a K-1, files you as self-employed, and asks for the firm's returns. You cannot get them, or the managing partner will not release them, and the file stalls on documents the guide never asked for.

The second is guaranteed payments that get left out because you made partner recently. A lender who treats the one-year K-1 as a one-year job history is missing the exception, and missing your associate years. The partnership agreement and the year-to-date statement bring that income back into the file.

The third is ordinary income that was never distributed. You see $40,000 of profit share on the K-1 and expect it to count, but the firm retained it to fund growth. Under the rule it can still count if the firm has the liquidity to support the withdrawal, and that takes a little documentation from the firm's side, so it helps to ask the firm's controller early.

The fourth is the down payment. If your share of the firm's profit is in a capital account rather than in your checking account, the money for closing has to come from somewhere the file can document. Using money from a business account for a down payment covers what that takes.

An illustration

Numbers below are made up to show the mechanism. They are not a quote or an offer.

Say you own 4% of an engineering partnership, and your last two K-1s show the following.

Line	Year one	Year two
Guaranteed payments to the partner	$174,000	$186,000
Your share of ordinary income	$28,000	$32,000
Distributions received	$27,500	$31,000

The two years of guaranteed payments are averaged, and your share of ordinary income counts because the distributions line up with it.

Qualifying income	Monthly
Guaranteed payments, two-year average	$15,000
Share of ordinary income, two-year average	$2,500
Total	$17,500

Suppose instead that the firm retained your share of ordinary income both years and the distributions line reads zero. The guaranteed payments are unchanged at $15,000 a month. The $2,500 stays in the file only if the firm can show the liquidity to have paid it, and if it cannot, the file works on $15,000. Either way, the guide does not call for the engineering firm's tax returns.

What to do with this

Your most recent K-1 is the place to start, because the ownership share printed on it tells you which document list you owe. With it in hand, the homepage tools will show you pricing for your own scenario without a credit pull and without creating an account. Rate & Best Fit shows scenario pricing from the information you enter, and when you see the sheet you can choose a rate option that works best for you. That selection can change as the file comes together.

From there, you can get pre-approved with your returns and your K-1s actually reviewed rather than typed into a form.

Common questions

Is a partner who owns less than 25% of the firm self-employed for a mortgage?

No. Fannie Mae Selling Guide B3-3.4-19 gives income requirements for a client with less than 25% ownership of a partnership, S corporation or LLC, and sends only those above the line to the self-employed section, B3-3.5-01. Freddie Mac's Section 5304.1 says 25% or more is self-employed. Your ownership share decides it, and your title does not.

What documents does a lender need for K-1 income under 25% ownership?

The most recent two years of your signed personal federal income tax returns, all pages and schedules, with the IRS Schedule K-1s attached. When the K-1 reports rental income only, Fannie Mae asks for one year. Freddie Mac also asks for year-to-date income documentation where it is available and for verification that the business currently exists. The firm's own tax returns belong to the self-employed list.

Do guaranteed payments from a partnership count as income for a mortgage?

Yes. Fannie Mae B3-3.4-19 allows guaranteed payments to the partner from a partnership or an LLC to be added to your cash flow when you have a two-year history of receiving them. Freddie Mac Section 5303.1 accepts guaranteed payments for services on the same two-year basis.

I just made partner. Do I need two years of K-1s?

Not always. Fannie Mae writes an exception for a client who recently acquired nominal ownership in a professional services partnership, such as a medical practice or a law firm, after an established employment history there. The lender may rely on your guaranteed compensation, evidenced by your partnership agreement and supported by your current year-to-date income. Freddie Mac allows a shorter history with a written analysis and at least 12 months of receipt.

Does my K-1 income count if the firm did not distribute it?

It can. Fannie Mae counts your share of ordinary income when it was actually distributed to you and is consistent with the business income being used, or when the business has adequate liquidity to support the withdrawal of earnings. If the distributions line on your K-1 is zero, the lender looks at the firm's liquidity. Guaranteed payments are unaffected by this test.