Can you use an LLC to qualify for a mortgage?

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

It is certainly possible to use income from an LLC to qualify for a mortgage but the process requires additional documentation. The specific qualification guidelines you are required to meet depend on how much of the LLC you own and the cash flow characteristics of the business.

Mortgage Requirements If You Own Less Than 25% of an LLC

If you own less than 25% of the LLC, you are usually required to provide your personal tax returns and K-1s from the LLC for the prior two years. The K-1 shows your ownership percentage of the business, your share of the business’s income (or loss) as well as any distributions or guaranteed payments you received.

Lenders use your K-1 to verify that the cash distributions you receive from the LLC are consistent with your income as reported on the document. For example, if your share of the LLC’s ordinary income for the year is $40,000 and you received at least $40,000 in cash distributions, this is an ideal scenario when you apply for a mortgage. The lender also reviews the K-1 to confirm that the business has sufficient liquidity and assets to continue paying distributions.

If these conditions are met, then the lender can include your income according to the K-1 in your loan application. Types of LLC income that can be used to qualify for a mortgage include the following:

Ordinary business income

Net rental real estate income

Other net rental income

Guaranteed payments (please note that a two year history of receiving guaranteed payments is not required if you had a previous working relationship with the LLC before you acquired your ownership stake in the business)

Your LLC income is added to any other income sources such as employment earnings to determine the mortgage you can afford.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford based on your monthly income and debt expenses

If there is a significant discrepancy between your share of the LLC’s income and the cash distributions you actually receive from the business, the lender is required to obtain additional information about the business to verify that it has the financial ability to make distributions.

For example, if your share of the business’s income is $40,000 but you only received $20,000 in cash distributions, this may be problematic and you may not receive full credit for the LLC income. In this case the lender may request a balance sheet, profit and loss (P&L) statement or other documents to assess the LLC's financial wherewithal.

Mortgage Requirements If You Own More Than 25% of an LLC

In most cases, if you own more than 25% of an LLC you are required to provide your personal and business tax returns and K-1s for the past two years. If you would prefer not to submit your tax returns, the lender can also use your personal and business tax transcripts for the prior two years. You may also be required to provide a year-to-date P&L statement and current balance sheet for the business.

Lenders use these documents to evaluate the overall financial performance of the business and to determine the LLC’s cash flow. Items such as depreciation, amortization and one-time losses are added back to the business’s cash flow while travel expenses, non-recurring income and debt balances due within a year are subtracted from cash flow. The lender includes your share of the business’s adjusted cash flow -- based on your ownership percentage -- in your mortgage application.

The lender is also required to confirm that the LLC’s income is relatively steady. If the business’s revenue and income are declining, you may not be able to use income from the LLC to qualify for a mortgage.

The documents must also demonstrate that the business has enough capital to pay distributions going forward. Lenders usually review your K-1s to satisfy this requirement but in some cases use balance sheet metrics instead.

For LLCs that sell physical products, lenders typically use the Quick Ratio ((current assets - inventory) ÷ current liabilities) to assess the business’s liquidity. For other types of businesses with little or no inventory such as service, technology or media companies, lenders usually apply the Current Ratio (current assets ÷ current liabilities) to measure liquidity.

For both methods, a ratio above one is usually required to include LLC income in your application. The use of these ratios also underscores why lenders typically request a current balance sheet when you apply for the mortgage.

Additionally, if you intend to use money from a business account to pay for your down payment, closing costs or reserves, the lender reviews monthly bank statements and the balance sheet for the LLC to verify that the business has enough capital remaining to fund its operations.

We should also highlight that if you own 25% or more of a business, you are classified as self-employed according to standard mortgage guidelines. This means that in most cases, lenders average your income for the prior two years according to your tax returns to determine your monthly gross income.

For example, if you earned $80,000 last year and $70,000 the prior year, lenders add your income for both years and divide by 24 months to calculate your average monthly gross income, which is $6,250 in this scenario ($80,000 + $70,000 = $150,000 ÷ 24 months = $6,250).

Please note that a self-employment history of only one year is permitted if you previously worked in a similar industry or position and your income has remained stable or increased.

Exceptions to LLC Mortgage Document Requirements

As outlined above, in most cases you are required to provide two years of tax returns and K-1s if you want to use income from an LLC for a mortgage. There are scenarios, however, when only one year of tax documents is required. This usually happens when your income is steady and you have an extended work history in a specific field.

In this case you are only required to provide your personal and business income tax return for the prior year, assuming you were self-employed for the full year. The lender is also required to submit a cash flow analysis that documents your income.

Additionally, if you meet several conditions you are not required to submit business tax returns. In this scenario you are required to:

provide two years of personal tax returns

use personal financial sources to pay for your down payment, closing costs and meet reserve requirements

have at least a five year self-employment work history with the same business

show an increase in income over the prior two years

In closing, as long as you provide the right documentation, you can use income from an LLC to qualify for mortgage. Because the qualification guidelines vary based on your ownership interest, work history and other factors, we recommend that you contact multiple lenders in the table below to learn more about their requirements. Shopping lenders also enables you to find the best mortgage terms.

Sources

"B3-3.1-09, Other Sources of Income, Schedule K-1 Income."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, October 2 2019.  Web.

"B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, October 24 2016.  Web.

"B3-3.4-01, Analyzing Partnership Returns for a Partnership or LLC."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, June 5 2019.  Web.

"B3-3.3-07, Income or Loss Reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, June 28 2016.  Web.