Did you know that as a self-employed borrower, having sufficient cash in your business is crucial when using certain income types? It’s true! A borrower must have a 2-year history of receiving income and ensuring the business has enough liquidity to support it.

Using K1 Income

When utilizing any form of K1 income, such as guaranteed payments to partners, it is essential to assess the borrower’s income history and the business’s liquidity. This includes net rental income, ordinary income, real estate income, and more.

The Importance of Liquidity

To determine if the business has sufficient liquidity to pay out the income, it is crucial to evaluate its cash distribution history. If the business demonstrates a consistent and stable track record of cash distributions, no further documentation of liquidity is required.

The Quick Ratio Test

However, if the business does not exhibit a consistent cash distribution history, additional measures must be taken. One such test is the Quick Ratio test, which calculates the ratio of current assets minus inventory to current liabilities. This test helps determine the business’s ability to meet its short-term obligations.

The Current Ratio Test

Alternatively, depending on the type of business, the Current Ratio test can be used. This test involves dividing current assets by current liabilities. Similar to the Quick Ratio test, it assesses the business’s financial stability.

Stability Requirements

To be considered stable, either the Quick Ratio or the Current Ratio test must yield a ratio of 1 or more. This requirement ensures that the business has sufficient resources to meet its financial obligations without exceptions.

As a self-employed borrower, understanding the requirements for certain income types is crucial. By reviewing a borrower’s 2-year income history and assessing the business’s liquidity through the Quick Ratio or Current Ratio tests, MortgageDepot ensures a thorough evaluation of a borrower’s financial stability. Rest assured that our commitment to providing reliable mortgage solutions remains unwavering.

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