The 25% Problem: Why Founders Get Declined

A familiar story. A founder takes a senior role at a growth-stage company that has recently raised a strong Series B. He owns 26 percent of the business, draws a competitive W-2 salary, and has built a clean personal balance sheet over a decade of disciplined saving. He finds the house he wants, walks into his bank confident the loan will be a formality, and is declined.

Nothing about his financial life is broken. The numbers tell a coherent story: real income, real liquidity, real reserves. But the bank is following a rule that has very little to do with his actual ability to pay the mortgage, and that rule turns one of the most successful people in the room into the wrong kind of applicant.

The 25 Percent Threshold

When a mortgage applicant owns 25 percent or more of an operating business, most banks are required to pull the company's tax returns and consolidate the K-1 with the personal return. The qualifying number stops being "what you take home" and becomes "what you take home, plus your share of how the business looks on paper."

For many founder-led companies, that paper picture is, by design, unflattering. Items that flow through the K-1 as losses or low taxable income get added against the founder's W-2, and in many cases, they wash it out entirely.

In the early years, many high-growth companies necessarily show negative income. This is common sense to any venture team or veteran chief financial officer.

Invisible Assets the Bank Cannot Use

A balance sheet stacked with brokerage assets, retirement accounts, and operating cash does not enter the qualifying math. The bank can see it. The bank simply cannot use it.

This is the 25 percent problem. It is not a credit problem. It is not a cash flow problem. It is an underwriting taxonomy problem, and it generates a "decline" no matter how strong the applicant.

Case in Point: Two Healthy Businesses, One Ugly K-1

The 25 percent consolidation rule can catch two different kinds of businesses, both healthy.

The tax-optimized profitable business. Many founder-led companies generate strong cash flow but show very little (or no) taxable income on the K-1. Net operating losses carried forward, accelerated depreciation, R&D credits, and growth investment expensed against revenue are legitimate, deliberate features of a well-run, tax-efficient business. They are also exactly what make the K-1 an unhelpful document for qualifying a mortgage.

The hyper-growth company with strong unit economics. Revenue is growing fast and gross margin is healthy, but the bottom line is meaningfully negative because the company is deliberately investing ahead of revenue: sales and marketing, hiring, product, and infrastructure. Those costs are choices, not weaknesses, and they would shrink quickly if the company took its foot off the gas. The K-1 still reads as a loss, and a conforming bank will treat it that way.

In both patterns, the founder's personal position can be strong: real W-2 income, real liquidity, real reserves. The bank's underwriting math simply does not have a way to express that.

What Banks Cannot Do, Even When They Say They Want To

Conventional underwriting follows agency guidelines that were written for W-2 employees and salaried professionals, not for owner-operators in tax-optimized growth businesses. When the K-1 wipes out the qualifying income, the bank has no place to put the rest of the picture.

Pledged-asset programs sometimes look like the answer. In practice, they often introduce a phantom payment against the pledged collateral that further deteriorates the qualifying math, and they shift the relationship into one where the bank is using the founder's own liquidity as leverage against itself. For many clients, that is an expensive way to solve the wrong problem.

A Better Approach: Read What the Bank Cannot

For the tax-optimized profitable business: underwrite the cash. The cleaner path is to take the personal tax returns out of the file entirely and let the founder's actual cash flow speak for itself. Twelve months of business bank statements showing income-related deposits become the basis of qualification. The applicant's ownership percentage is applied (a 26 percent owner is credited with 26 percent of those deposits). A CPA letter quantifies a reasonable expense factor, so the qualifying number reflects net cash flow rather than gross receipts. The result is an income figure that mirrors how the business actually performs in cash, not how it has been engineered on paper for tax efficiency.

For the hyper-growth company: read the economics behind the K-1. Once a business has reached sufficient scale, certain creative lenders can give meaningful weight to gross margin, revenue trajectory, and the discretionary nature of growth costs, rather than reading net income at face value. The underwriting question becomes "what does this business look like at a steady-state run rate?" instead of "what does the K-1 say last year?" That kind of analysis requires a lender set up to read the business behind the return, which is the work Condon Capital Group does every day.

A to B: A Two-Step Path

A non-traditional structure is rarely the final answer, and it does not need to be.

For many founders the right framing is two-step: close the home today with a structure that reflects the real economics of the business, then refinance into a traditional, longer-term product as the company's reported financials catch up (whether through lower growth investment, a simpler tax structure, or both).

For other founders, particularly those whose ownership and tax structure are intentional and not expected to change, the right answer is to stay non-traditional. Restructuring a business return to qualify for a conforming loan can easily cost more in incremental taxes than the rate premium costs in incremental interest. That comparison is a number, not a hypothetical, and it should be modeled before any application is filed. It is just math, and a good team will help you figure it out.

Where Coordination Earns Its Keep

A financing decision of this kind is rarely just a financing decision; it touches tax strategy, after-tax cash flow, balance sheet flexibility, and long-term optionality. That is the work Whitwell & Co. does in coordination with Condon Capital Group: model the alternatives, quantify the tradeoffs, and choose the structure that protects what the founder has built rather than penalizing it. Proactive. Private. Precise.

Next Steps

If you, or a founder you know, have been told the bank cannot get the deal done, the conversation is worth having before assuming the answer is cash, a smaller home, or a pledged-asset workaround. A 20-minute call is typically enough to know whether a clean path exists, and we will tell you honestly if it does not. A soft credit pull and a brief financial checklist on top of the short call are typically enough to know within two to three business days whether a clean path forward exists.

This is the first paper in a joint Entrepreneur Financing Series authored by Whitwell & Co., LLC and Condon Capital Group. Whitwell & Co., LLC is an SEC-registered investment adviser. This paper is for educational purposes only and does not constitute tax, legal, accounting, or mortgage advice. Mortgage products referenced are originated through Condon Capital Group and are subject to lender underwriting, qualification standards, and product availability, which change over time.