Nevada business owner smiling at iQRATE Mortgages letter.

A Nevada S-Corp Guide to Mortgage Qualification

Q: Why can a low S-Corporation salary negatively impact a mortgage application?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: How do mortgage lenders calculate an S-Corp owner's true qualifying income?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: What specific documents are required to prove an S-Corp's full income for a mortgage?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: Can non-cash expenses like depreciation be added back to my income for qualification?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: How are business distributions viewed by mortgage underwriters?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: What is the difference between a P&L statement and tax returns during a loan application?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: What common mistakes should S-Corporation owners avoid when applying for a mortgage?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

Specialized In Jumbo Loans, Investor Loans, DSCR Loans, Non-QM Financing, Commercial Mortgages, and Tax-Informed Lending Strategies

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TL;DR

Low W-2 Salary: As an S-Corp owner in Nevada, your tax-efficient low salary can misrepresent your actual income to mortgage underwriters, potentially limiting your loan qualification.
Boosting Qualifying Income: Lenders can look beyond your W-2 by adding back your business's net profits and certain non-cash expenses, like depreciation, to calculate a more accurate qualifying income.
Documentation is Key: To prove your true earning power, you must provide comprehensive documentation, including two years of personal and business tax returns (with K-1s) and a current Profit and Loss statement.

Why does my low S-Corporation salary hurt my mortgage application?

As an S-Corporation owner in Nevada, you've likely structured your business for maximum tax efficiency. This often involves paying yourself a 'reasonable' but relatively low W-2 salary and taking the rest of the profits as distributions. While this is a smart move for tax purposes, it can create a significant hurdle when you apply for a mortgage.

Mortgage lenders, especially those using automated underwriting systems, initially focus on the income reported on your W-2. If you pay yourself a $60,000 salary but your business actually netted $200,000, a lender in Las Vegas might only pre-qualify you based on that $60,000 figure. This lower amount can drastically reduce your purchasing power or even lead to an outright denial. The data, information, or policy mentioned here may vary over time.

The key is to understand that this initial review is not the final word. Experienced lenders know that a W-2 from your own S-Corp doesn't tell the whole story. The challenge lies in properly documenting the full profitability of your business to prove you can comfortably afford the home you want.

What documents do I need to prove my business's real income?

To move past the W-2 salary and show underwriters the true financial strength of your S-Corporation, you need to provide a complete and organized set of documents. Lenders need a two-year history to establish a stable and reliable income stream. Be prepared to submit the following: The data, information, or policy mentioned here may vary over time.

A person organizing financial documents for a mortgage application.

Personal Federal Tax Returns (IRS Form 1040): You will need the last two years of your complete, signed tax returns, including all schedules.
Business Federal Tax Returns (IRS Form 1120-S): The last two years of returns for your S-Corporation are required. This document is central to the income calculation.
Schedule K-1 (Form 1120-S): This form is part of the 1120-S and shows your individual share of the corporation's income, losses, deductions, and credits. You will need the K-1s for the last two years.
Year-to-Date Profit and Loss (P&L) Statement: A current P&L, typically within the last 60-90 days, shows the lender that your business is still performing well in the current year.
Business Bank Statements: Some lenders may request the last few months of business bank statements to verify cash flow and the health of the business.

How do lenders calculate qualifying income from a business tax return?

This is where the process gets detailed, but it's designed to give you credit for your business's success. An underwriter won't just look at one number; they will perform a cash flow analysis to determine your stable monthly income. The calculation typically starts with your W-2 salary and then adds back business profits and certain non-cash expenses.

Calculator and pen on top of business financial statements.

Here’s a simplified breakdown:

Start with Your W-2 Salary: The salary you pay yourself is the baseline.
Add Ordinary Business Income: The underwriter looks at the net profit of the business, found on your 1120-S and reported on your K-1.
Average the Income: Lenders will typically average the business's net income over the most recent two years to account for fluctuations. If your income has declined significantly in the most recent year, the lender will likely use the lower figure to be conservative. The data, information, or policy mentioned here may vary over time.

Example Calculation

Let's say you want to buy a home in Reno and your financials look like this:

W-2 Salary: $70,000 (consistent for both years)
2022 S-Corp Ordinary Income (from K-1): $110,000
2023 S-Corp Ordinary Income (from K-1): $130,000

An inexperienced lender might stop at the $70,000 salary. However, a knowledgeable underwriter will calculate your income like this:

Calculate Average Business Income: ($110,000 + $130,000) / 2 = $120,000
Combine with W-2 Salary: $70,000 (W-2 Salary) + $120,000 (Average Business Income) = $190,000

This $190,000 figure is much more representative of your earning power than the $70,000 salary alone. But the calculation doesn't stop there.

Can I add back paper losses like depreciation to my income?

Yes, and this is a critical advantage for S-Corp owners. Your tax returns often include several 'paper losses' which are non-cash expenses that reduce your taxable income but don't actually take money out of your business's bank account. The most common of these is depreciation.

Depreciation is the annual deduction allowed to recover the cost of assets like equipment, vehicles, or property over their useful life. Since you didn't actually spend that money this year, underwriters can add it back to your income for qualifying purposes. You can typically find the depreciation figure on Line 14 of your Form 1120-S. The data, information, or policy mentioned here may vary over time.

Example with Depreciation Add-Back

Continuing our Reno homebuyer example:

Combined Income (from above): $190,000
2022 Depreciation: $15,000
2023 Depreciation: $17,000

Calculate Average Depreciation: ($15,000 + $17,000) / 2 = $16,000
Adjusted Qualifying Income: $190,000 (Combined Income) + $16,000 (Average Depreciation) = $206,000

By adding back depreciation, your qualifying income jumps from $190,000 to $206,000, significantly increasing the loan amount you can qualify for.

How are distributions from the business viewed by underwriters?

Distributions are payments made from the company's profit to you, the shareholder. It's crucial to understand that distributions are not considered income for qualification purposes. They are a return of equity that has already been accounted for in the net income calculation.

However, underwriters absolutely look at your history of distributions. They do this to assess the stability of the business. If your company has a net income of $150,000 but you took distributions of $200,000, it means you pulled money from the company's cash reserves. This can be a red flag, as it suggests the business may not be sustainable or liquid enough to support your salary and the proposed mortgage payment long-term. The data, information, or policy mentioned here may vary over time.

Healthy distributions that are less than the net income show that the business is profitable and retaining capital to grow, which is a positive sign for lenders.

What is the difference between a P&L statement and tax returns for qualifying?

Both documents are important, but they serve different roles in the mortgage application process.

Tax Returns: These are the official record of your income. Because they are filed with the IRS, lenders consider them the primary source of truth for your income history. The two-year average calculation is based almost entirely on your 1120-S and 1040 forms.
Profit & Loss (P&L) Statement: This is an interim report. If you're applying for a loan in August, your tax returns only show income through the end of last year. A year-to-date P&L shows the underwriter how your business is performing this year. Its purpose is to confirm that your income is stable or increasing. If the P&L shows a significant decline in revenue compared to the prior year, it could jeopardize your approval. The data, information, or policy mentioned here may vary over time.

Think of it this way: tax returns prove your past, and the P&L validates your present.

Should I adjust my salary before applying for a home loan in Reno?

This is a common question, and the answer is usually no. While suddenly increasing your W-2 salary right before applying might seem like a good way to show more income, it can create more problems than it solves.

First, lenders look for stability. A sudden, drastic salary change can be a red flag to underwriters, prompting more questions and scrutiny. Second, increasing your W-2 salary also increases your payroll tax liability, costing you real money. A more effective strategy is to work with a mortgage professional who knows how to properly analyze your business tax returns. A skilled loan officer can present your full financial picture, including add-backs like depreciation, to the underwriter, making a salary adjustment unnecessary.

What common mistakes do S-Corporation owners make on loan applications?

Navigating the mortgage process as a business owner in Las Vegas or anywhere in Nevada can be complex. Avoiding these common errors can lead to a much smoother experience:

Providing Incomplete Documentation: Forgetting to include all schedules with your tax returns or only sending your personal 1040s without the business 1120-S is the quickest way to stall your application.
Commingling Personal and Business Funds: Using your business checking account for household groceries or personal vacations makes it difficult for an underwriter to verify the true revenue and expenses of the business. Keep finances separate.
Applying With an Inexperienced Lender: Many loan officers are only familiar with standard W-2 borrowers. They may not know how to analyze a business return or calculate add-backs, leading them to issue an incorrect denial. Partner with an expert in self-employed mortgages.
Taking on New Debt Before Closing: Financing a new work truck or taking out a large business loan just before your mortgage closes can alter your debt-to-income ratios and put your final approval at risk. Wait until after you have the keys to your new home. Understanding how your S-Corporation income is calculated is the first step. If you're a business owner in Nevada, partnering with a mortgage expert who specializes in self-employed borrowers can make the difference between denial and approval. Let's review your specific scenario to build a clear path to your new home.

As an S-Corp owner, your finances are unique. Ready to see how your business's true profitability translates to purchasing power? Apply now for a personalized assessment from experts who understand self-employed income.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.