Fannie Mae and Freddie Mac came to a conclusion when CALCULATING SE:F EMPLOYED INCOME WHEN NO DISTRIBUTIONS

They only want to allow borrowers to use income that they actually received from their business versus what they claimed on their tax return.

In order to do this they went to a rule that you can use as income the amount of funds that they actually distributed out of the company to themselves up to the amount of the net income listed on their K-1. This is for S-Corps.

If your net income is $100,000 but you only took distributions of $50,000 then you only get credit for $50,000 or if their CPA listed no distributions then no income can be used.

STEPS TO TAKE EVALUATING K-1

#1 – If you have distributions which are usually coded by a D on line 16 on the K-1 and this amount will make your deal work and is less than or equal to your net income then you are done. No further action is needed.

#2 – If there are no distributions or if you need more of that net income you then go to the liquidity quick ratio. If you click the link below it will open the spreadsheet our underwriters use. Go to the second tab labeled liquidity ratios. Navigate to the Schedule L on the S-Corp tax return and input the numbers in the fields listed at the top. If your quit ratio listed in the gray area shows equal to or better than 1 then no further action is needed. You can use the full net income on the K-1. Anything less than 1 you must move to the next step. Quick ratio shows when assets are greater than liabilities based on certain tax form fields.

#3 – Your last option to be able to use net income is to evaluate the working capital ratio. This just means the business cash flow via their bank statements. You click the tab showing “Working Capital Review” and we look at the most recent six months of business bank statements. You simply input the deposits and then you input all the withdrawals. You remove any items like obvious direct deposits not related to the business or withdrawals that are obvious. This is not really negotiable but we are just looking to see if deposits are more than withdrawals over six months. If you are $1.00 more in deposits over a full six months you can use net income. If you are $1.00 or less then you cannot use net income.