source:
  type: guide
  id: fnma-sel-b3-3.6-07
  authority: Fannie Mae Selling Guide B3-3.6-07 — Income or Loss Reported on IRS Form
    1065 or IRS Form 1120S, Schedule K-1
  description: Fannie Mae Selling Guide B3-3.6-07 — Income or Loss Reported on IRS
    Form 1065 or IRS Form 1120S, Schedule K-1.
  coverage_tier: operative
obligations:
- id: fnma-sel-b3-3.6-07-full
  canonical_id: fnma-sel-b3-3.6-07-full
  section: Fannie Mae Selling Guide B3-3.6-07 — Income or Loss Reported on IRS Form
    1065 or IRS Form 1120S, Schedule K-1
  type: do
  tags:
  - regulator-direct
  - fnma
  - selling-guide
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: Fannie Mae Selling Guide B3-3.6-07 — Income or Loss Reported on IRS
      Form 1065 or IRS Form 1120S, Schedule K-1
    source_class: fnma-guide
    source_url: https://singlefamily.fanniemae.com/media/document/pdf/selling-guide
    snapshot_id: 5f7b8b79da595d76
    fetched_at: '2026-05-25T14:09:57Z'
    content_hash: sha256:98cf85a02861bbe84914a0e339b327c8fc131869a8a573882007bbeea60c5701
    paragraph_quote: 'B3-3.6-07, Income or Loss Reported on IRS Form 1065 or IRS Form
      1120S, Schedule K-1 (05/07/2025) Introduction This topic contains information
      on income or loss reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1,
      including: Income or Loss Reported on IRS Form 1065 or IRS Form 1120S, Schedule
      K-1 Documentation Requirements Published May 6, 2026 380 Income or Loss Reported
      on IRS Form 1065 or IRS Form 1120S, Schedule K-1 The version of Schedule K-1
      that is utilized to report a borrower’s share of income (or loss) is based on
      how the business reports earnings for tax purposes: partnership — reported on
      IRS Form 1065, Schedule K-1; S corporation — reported on IRS Form 1120S, Schedule
      K-1; and LLC — reported on either IRS Form 1065 or IRS Form 1120S, Schedule
      K-1, depending on how the federal income tax returns are ﬁled for the LLC. The
      lender must use caution when including income that the borrower draws from the
      borrower’s partnership or S corporation as qualifying income. Ordinary income,
      net rental real estate income, and other net rental income reported on Schedule
      K-1 may be included in the borrower’s cash ﬂow provided the lender can conﬁrm
      that the business has adequate liquidity to support the withdrawal of earnings,
      as described below: If the borrower has a two-year history of receiving “guaranteed
      payments to the partner” from a partnership or an LLC, these payments can be
      added to the borrower’s cash ﬂow. If the Schedule K-1 reﬂects a documented,
      stable history of receiving cash distributions of income from the business consistent
      with the level of business income being used to qualify, then no further documentation
      of access to the income or adequate business liquidity is required. But if the
      Schedule K-1 does not reﬂect a documented, stable history, then the lender must
      conﬁrm adequate business liquidity, as discussed below. If business tax returns
      are required, then the lender must consider the type of business structure and
      analyze the business returns, according to the requirements described in B3-3.5-01,
      Underwriting Factors and Documentation for a Self-Employed Borrower. The lender
      may use discretion in selecting the method to conﬁrm that the business has adequate
      liquidity to support the withdrawal of earnings. When business tax returns are
      provided, for example, the lender may calculate a ratio using a generally accepted
      formula that measures business liquidity by deriving the proportion of current
      assets available to meet current liabilities. It is important that the lender
      select a business liquidity formula based on how the business operates. For
      example: The Quick Ratio (also known as the Acid Test Ratio) is appropriate
      for businesses that rely heavily on inventory to generate income. This test
      excludes inventory from current assets in calculating the proportion of current
      assets available to meet current liabilities. Quick Ratio = (current assets
      — inventory) ÷ current liabilities The Current Ratio (also known as the Working
      Capital Ratio) may be more appropriate for businesses not relying on inventory
      to generate income. Current Ratio = current assets ÷ current liabilities While
      a result of one or greater is generally suﬃcient to conﬁrm adequate business
      liquidity to support the withdrawal of earnings, lenders may support adequate
      liquidity using alternative methods with a documented rationale. Published May
      6, 2026 381 Documentation Requirements The following table describes the documentation
      the borrower must provide. ✓ Documentation Requirements the most recent one
      or two years of signed individual federal income tax returns—IRS Form 1040 including
      IRS Schedule K-1, in accordance with the requirements in B3-3.5-01, Underwriting
      Factors and Documentation for a Self-Employed Borrower. • the most recent two
      years of business federal income tax returns (IRS Form 1065 or IRS Form 1120S),
      unless the requirements to waive business tax returns have been met; or • the
      most recent one year of business federal income tax returns, in accordance with
      the requirements in B3-3.5-01, Underwriting Factors and Documentation for a
      Self-Employed Borrower. Recent Related Announcements The table below provides
      references to recently issued Announcements that are related to this topic.
      Announcements Issue Date Announcement SEL-2024-01 February 07, 2024 Section
      B3-3.7, Self-Employment Documentation Requirements for a Business'
  judgment: false
