How Asset Depletion Asset Rules Work for K-1 Partners and LLC Owners

The Quick Read: Asset depletion for a K-1 partner or LLC owner counts only personal, titled liquid assets, after the down payment, closing costs and reserves come out, divided over a lender-set period to create qualifying income, while K-1 profit, retained earnings and money sitting in the entity’s operating account generally stay out of the pool.

• Ownership decides eligibility. Cash in your name counts. Cash in the company’s name usually does not, subject to lender guidelines.
• K-1 profit is a tax-form number, not an asset. Only cash that was actually distributed to you and sits in a personal account can count.
• Funds committed to the purchase come out of the pool before any income is calculated.
• On a primary residence, asset-depletion qualifying runs up to about 80% LTV through select lenders. Exact terms vary by program.
• A rental that carries itself on rent usually belongs in a DSCR file instead, which is reviewed on property cash flow.

What Asset Depletion Actually Is

Asset depletion is a way to turn a personal balance sheet into qualifying income. It is a method, not a separate kind of property. Nothing is sold, and nothing is pledged. The lender takes the eligible liquid assets, applies its haircuts, divides what remains over a set number of months, and treats the result as monthly income.

Lendmire arranges these files as a broker through select wholesale lenders. Across that network, the pattern is consistent: the file is reviewed on documented income under the applicable program, subject to lender guidelines, and the asset pool is the documentation.

The method fits a specific borrower. Think of a partner or LLC owner whose traditional personal-income documentation shows modest income because of depreciation, write-offs and reinvestment, yet who holds real liquidity. The returns understate the wealth. Asset depletion reads the wealth directly.

How Underwriting Treats the Numbers, Step by Step

The sequence is the same across most programs we see. The inputs differ by lender.

1. Identify eligible assets. Personal checking, savings, money market and brokerage accounts are the usual core. Retirement accounts are program-dependent. Each asset class gets its own haircut, and those tables differ from one lender to the next.

2. Subtract funds committed to the deal. The down payment, closing costs and required reserves come out first. Reserves commonly run around six months of the housing payment. Borrowers miss this step more than any other.

3. Divide by the program’s divisor. The divisor is the depletion period in months. A shorter period produces more monthly income from the same pile, and a longer one produces less. The divisor often changes purchasing power more than any other variable on the file.

4. Run the result through debt-to-income. The imputed income is treated like salary, so the borrower’s other monthly debts still matter.

5. Document it. Recent statements for every account being counted, with the owner’s name visible. Large deposits may need a sourcing explanation.

Notice what the formula never asks for: the K-1. The form can still matter for other reasons, such as ownership percentage and entity structure. It simply does not feed the asset pool.

Whose Money Is It? The Table That Decides Most Files

Eligibility turns on titling. The same dollars can count or not depending on whose name sits on the account.

Two rows surprise people. The first is the operating account. A 100% owner still cannot treat company cash as personal cash, because income qualification attaches to the borrower of record. The second is the K-1 itself. It reports your share of the partnership’s items, so it can show a large profit while you received little or none of it.

A terminology note saves confusion. The word depletion also appears on the K-1 form as a line item. It has nothing to do with the mortgage method, which uses the word for spending down a balance over time.

Moving Entity Money the Right Way

If your liquidity sits in the entity, the path is a documented distribution. The money leaves the company, lands in a personal account in your name, and the trail is clear: the entity’s records, the transfer, and the personal statement showing it arrived.

Three practical points apply on most programs:

• Plan the timing. A recent, unexplained transfer invites questions. Ask a broker before you move funds, because documentation and seasoning expectations vary by lender.
• Consider the business. Pulling cash out can strain operations. A file that works on paper but starves the company is not a good plan.
• Do not count funds twice. Money used for the down payment cannot also sit in the depletion pool. The formula subtracts it first.

Entity Types and Ownership Share

How you hold the business changes the paperwork, not the core rule.

In a multi-member LLC, the operating agreement shows who can borrow and who can pledge assets. Some lenders prefer the managing member or a majority owner as the borrower. Ownership share matters most when the file uses bank statements instead, where a 50% partner generally counts half of business deposits.

The Rule Behind the Method

No regulator defines asset depletion, so the divisor, haircuts and eligible-asset list belong to each lender’s guidelines. What federal rules do set is the framework underneath. On an owner-occupied consumer mortgage, the CFPB’s ability-to-repay rule requires a reasonable, good-faith determination that the borrower can repay. The regulation text allows that determination to rest on current or reasonably expected income or assets, other than the value of the dwelling securing the loan. It also requires the lender to verify the income or assets it relies on using third-party records, which in practice means account statements.

That explains two things. It is why qualifying on assets is legitimate, and it is why the home you are buying cannot be counted as your repayment source.

Occupancy also decides the disclosure regime. An owner-occupied file, meaning a primary residence or second home, is a consumer mortgage, and TRID disclosure rules apply. A bank-statement loan on a non-owner-occupied rental, including a short-term rental, is business-purpose and exempt from TRID. Asset depletion lives mostly on the owner-occupied side.

Where the General Rule Breaks

Several situations bend the standard approach.

Bank statements versus asset depletion. These read the same owner two different ways. Bank statements measure business cash flow: twelve months of deposits, your ownership percentage, and a lender-specific expense factor. Asset depletion measures the personal balance sheet. Switching between them is a re-underwrite under a different program, not a conversion. Across the wholesale network, bank-statement programs reach up to 90% LTV on a primary-residence purchase or rate-term refinance, and asset depletion reaches up to about 80% LTV on a primary residence. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.

Undistributed K-1 income. If your income is mostly allocated and not paid out, the bank-statement path may fit better. Lendmire’s piece How an Asset Depletion Mortgage Counts Undistributed K-1 Income covers that split in detail.

Retirement and joint accounts. Both depend on the program. Some lenders discount retirement balances heavily. Others limit which account types count. A joint account may need the co-owner’s involvement. Do not assume either way before the lender’s sheet confirms it.

Sale or wind-down of the business. Allocations on a K-1 may bear no relation to cash on hand. Once sale proceeds sit in a personal account, they may become eligible assets, subject to program rules.

Passive losses. Underwriters typically do not let passive losses count as qualifying income, and they may not offset the asset-derived income either. The lender decides how the file is read.

Cash-out. Asset depletion is a purchase and refinance qualifying tool. On owner-occupied cash-out, bank-statement programs top out around 80% LTV, with the fixed expense ratio set by loan size and credit. Investment-property cash-out tops out around 75% LTV. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.

A Worked Example With No Dollar Signs

Picture a partner in a multi-member LLC. She reports a small taxable profit because the firm reinvests and takes heavy depreciation. Her personal brokerage and savings accounts are large. Her share of the operating account is not hers to use.

Before: she looks light on paper. A conventional file reading her returns sees modest income and a high debt-to-income ratio.

After: the lender counts her personal brokerage and savings with haircuts, subtracts the down payment, closing costs and roughly six months of reserves, and divides the remainder over its divisor. The resulting income clears debt-to-income on a primary residence, with leverage up to about 80% LTV on the asset-depletion route. That is a modeled outcome, not a promise. Her credit, other debts and the property all still get reviewed. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.

Now change one fact. Say most of her liquidity sits in the firm’s operating account. The pool shrinks sharply, and she must either distribute funds, document them, and accept the effect on the company, or look at a bank-statement file that reads the business deposits instead.

Which Path Fits? A Decision Table

DSCR deserves a clear boundary. A business-purpose rental purchase generally is reviewed on the property’s income, not yours, so asset depletion adds little there. Lendmire’s complete DSCR loans guide covers that lane. If you are weighing which accounts to count, Lendmire’s piece Brokerage vs Retirement Accounts in Asset Depletion With K-1 Income works through it.

Key Terms Defined

Asset depletion: a method that divides eligible liquid assets over a set number of months to create qualifying income.

Divisor: the number of months the lender uses to spread the asset pool into monthly income.

Haircut: the percentage reduction a lender applies to an asset because its value may fluctuate or be hard to access.

K-1: the form reporting a partner’s or member’s share of an entity’s income, losses and deductions, which does not show cash received.

Distribution: cash actually paid from the entity to an owner.

Retained earnings: profit the entity keeps, which never reaches your personal account.

Seasoning: how long funds have sat in an account before the lender relies on them.

Common Mistakes

• Counting company cash as personal cash.
• Treating K-1 profit as a balance.
• Forgetting that the down payment and reserves leave the pool first.
• Moving a large sum right before applying without a clear paper trail.
• Assuming one divisor and haircut table apply everywhere.
• Using asset depletion on a rental that would qualify more cleanly as DSCR.

Next Step

If you are a partner or LLC owner and want to see how the numbers work, Lendmire can help you compare alt-doc options, including asset depletion and bank statement programs, based on your accounts, deposits, the property, credit profile, leverage and goals. Programs generally cover loans from about $125,000 to $3,500,000.

This article is general education, not legal or tax advice. Tax treatment varies; consult a qualified attorney or CPA about your own situation.

For current guidelines and terms, see Lendmire’s self-employed mortgage programs page.

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage brokerage serving self-employed and high-net-worth borrowers in 16 states. Bank statement, P&L-only, 1099-only and asset-based mortgages are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. CFPB Regulation Z §1026.43

2. Cornell LII, 12 CFR 1026.43