K-1 Income Has an Ownership Test. Does Your File Have the Right Proof?

A borrower sends a W-2 and a Schedule K-1 from the same company. They own a small share of the business, and both income streams are part of the purchase plan. The loan officer sees the familiar W-2, the processor sees an ownership line on the tax document, and the lender’s question is no longer obvious: which income is being used, and what exactly must be verified?

Fannie Mae’s October Selling Guide update makes that handoff worth tightening. It clarifies how lenders handle Schedule K-1 income when the borrower owns less than 25% of the business, including a new verbal employment verification requirement for a defined group of applications. The practical move is not to collect every business document preemptively. It’s to identify the qualifying-income lane first, then ask the lender for the right evidence.

What changed, and when

Fannie Mae updated its guidance on October 7, 2026. For loans using Schedule K-1 income from a business in which the borrower owns less than 25%, lenders must complete a verbal verification of employment (VOE) when the loan application is dated on or after December 2, 2026. That date is tied to the application, not the closing date.

The same announcement removed specific required methods for verbal VOE more broadly. Lenders may use a method that is reasonable, verifiable, and appropriate for the borrower’s employment or income type. The existing timing requirements remain. In the K-1/self-employment lane, Fannie Mae’s updated verbal verification of employment guidance says the VOE must be completed no more than 120 calendar days before the note date; the lender must verify the borrower continues the same income-earning activity. If only rental income is reported on the K-1, no verbal VOE is required for that income.

These are Fannie Mae rules, not a universal wholesale-market checklist. A lender may have its own implementation process or an investor overlay. Before applying the update to an active file, confirm the loan’s investor, lender policy, application date, and income being used. The Fannie Mae announcement and the current Schedule K-1 income section are the primary references.

Separate the income lanes before asking for documents

“The borrower has a K-1” doesn’t tell the lender what the K-1 is doing in the qualification. It may be evidence for business income, rental income only, or a second stream alongside wages from the same company. Those paths don’t call for identical documentation or verification.

For a borrower using K-1 business income with less than 25% ownership, Fannie Mae calls for the most recent two years of signed personal federal tax returns and K-1s, plus a two-year income history. For rental income only on the K-1, the Guide allows one year of personal returns and the K-1, and no verbal VOE is required for that income.

When the borrower is also using employment income from the same business, ownership share matters to the VOE path. Fannie Mae distinguishes below 25% ownership from 25% or more for verification requirements. If a borrower sits near that threshold, confirm the documented ownership and lender’s applicable treatment rather than relying on an intake note that simply says “minority owner.”

The quick guide below is a triage aid, not an underwriting decision. The lender still determines what can be used and what satisfies its file requirements.

A K-1 amount isn’t automatically available cash

The K-1 may report earnings that were not distributed to the borrower. Fannie Mae says the lender can consider the income only when documentation shows either that it was actually distributed and is consistent with the business income used to qualify, or that the business has adequate liquidity to support the withdrawal of earnings. The lender may use discretion in how it verifies that liquidity.

That distinction helps the loan team avoid a common loop: ask the borrower for a K-1, assume the reported amount is usable, and then reopen the file when the lender asks whether funds were paid out or remain in the business. If the income has not been distributed, ask the lender early what evidence it will accept for business liquidity. Don’t make the borrower guess at a package of entity statements, balance sheets, or accountant letters until the lender has defined the need.

For a broader look at defining a business-income document request before it goes to the borrower, EPC’s YTD profit-and-loss guide is useful adjacent reading. It covers how to pin down the lender’s purpose, date range, entity, and supporting materials instead of ordering a report by reflex.

Make the handoff specific enough to act on

Before setting expectations with the borrower, make one clean note that answers four questions: What investor and lender guide this file? What income is being used from the business? What ownership percentage does the documentation support? Who will obtain the VOE, by what approved method, and by when?

Then separate “income history” from “income verification.” A two-year K-1 history does not, by itself, show a current verbal VOE has been completed. Conversely, collecting a VOE for a rental-only K-1 when the Guide says it isn’t required may create unnecessary work. Keep the application date visible, especially for applications approaching December 2, and confirm the lender’s implementation rather than treating the calendar alone as authorization.

Borrowers can understand a short, accurate update: “The lender is reviewing both your wages and business income. We’re confirming which records support each piece and whether a current employment verification is needed under the investor’s rules.” That explains the next step without promising a qualifying result or asking the borrower to interpret agency language.

Fannie Mae’s Guide is an agency standard; lender instructions and the facts of the loan remain decisive.

Talk through a file handoff

If a K-1 file has multiple income lanes, ownership questions, or a lender request that needs sorting, talk with EPC about processing support. We can discuss the workflow and where a clearer handoff may help.

A note on use

This article is for general educational purposes only. It is not underwriting, legal, tax, accounting, compliance, or lender-specific advice. Requirements vary by investor, lender, loan program, AUS findings, business structure, and file circumstances. Confirm current guidance with the lender responsible for the loan.