Short answer
If you own less than 25 percent of an LLC or S corporation, Fannie Mae treats your K-1 income more simply than full self-employment. Lenders use two years of your signed personal tax returns and K-1s, a verbal check with the business, and proof the income was actually paid to you or that the business has the cash to support it. They don't need to analyze the whole business. Fannie Mae updated this in October 2026.
Who does this apply to?
Fannie Mae's Selling Guide B3-3.4-19 covers borrowers with less than 25 percent ownership of a business that issues a Schedule K-1, such as an LLC or S corporation. If you own 25 percent or more, the lender follows the self-employed rules instead, which usually means business returns too.
What documents will I need?
- Your signed personal federal tax returns for the most recent two years.
- Your Schedule K-1s for the same two years.
- A verbal verification of employment with the business.
If your K-1 shows only rental income, one year of returns and K-1 is enough, and no verbal check is needed.
How is the income figured?
The lender uses your share of the earnings shown on the K-1, generally with a two-year history. It can count that income only if it documents either:
- That the money was actually distributed to you, at a level consistent with the income used, or
- That the business has enough cash to support you taking it out.
Two years of guaranteed payments from the business can be added. If you recently became a small owner in a professional practice, like a medical or law office, after working there, the lender may rely on your guaranteed pay with your ownership agreement and year-to-date income.
How can I prepare?
Have your K-1s and personal returns ready, plus bank statements showing distributions. If your K-1 income dropped or the business keeps earnings instead of paying them out, talk with Tom early; it may change how much counts. Other income types: overtime, bonus and commission and RSU stock income.
Sources
- Fannie Mae Selling Guide B3-3.4-19, Schedule K-1 Income, Less Than 25 Percent Ownership (updated 10/07/2026)
- Fannie Mae Selling Guide B3-3.5-01, Underwriting Factors and Documentation for a Self-Employed Borrower
Checked November 2, 2026. Rules and dates change, so confirm current details before you rely on them.
General information only, not tax or legal advice. Program availability, eligibility and terms vary by lender and are subject to change and to underwriting approval. Not a commitment to lend.