Self-employed homebuyer strategically planning a Nevada mortgage.

Tax Extension for a Nevada Mortgage: A Strategic Guide

Q: Why is the two-year income average a problem for some self-employed borrowers?

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: Is it legal to file a tax extension to help with a mortgage application?

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 documents are required for a mortgage if I file a tax extension?

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: How do lenders verify the income on a Profit and Loss (P&L) statement?

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: Does the tax extension strategy work for different mortgage types like conventional and jumbo loans?

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 are the critical deadlines to be aware of for this mortgage strategy?

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: In what situations is filing a tax extension a bad idea 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

Published By

David Ghazaryan

Owner / Broker / Banker

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TL;DR

For self-employed individuals in Nevada whose income has recently grown, a standard two-year income average calculated by mortgage lenders can undervalue their current earnings and reduce their borrowing power. This guide outlines a strategy to address this issue:

Strategic Timing: Filing a federal tax extension allows you to strategically delay submitting your most recent tax return. This means lenders will use your two previously filed returns for their income calculation, bypassing a potentially lower average caused by a high-growth year following a low-income year.
Alternative Documentation: Instead of the newest tax return, you provide a comprehensive, current financial picture using a Year-to-Date Profit and Loss (P&L) statement. Lenders verify the income on the P&L by cross-referencing it with your recent business bank statements to confirm consistent deposits and stable profitability.
Legal and Accepted: This approach is a legal and routine financial strategy accepted for both conventional and jumbo loans, as it adheres to standard underwriting guidelines. Success depends on careful timing around key tax deadlines and providing clear, professional documentation.

How a Two-Year Income Average Can Hurt Your Business

Mortgage lenders, particularly for conventional loans backed by Fannie Mae and Freddie Mac, are required to calculate a stable and predictable income for self-employed borrowers. The industry standard is to average the adjusted gross income from your two most recently filed tax returns. While this method works for businesses with steady, predictable earnings, it creates a significant roadblock for entrepreneurs whose income has recently surged.

Imagine you are a consultant in Las Vegas. Your business struggled during its first year but has since gained major traction.

2022 Tax Return: Your net income was $60,000.
2023 Tax Return: Your business boomed, and your net income soared to $180,000.

If you apply for a mortgage in March 2024 after filing your 2023 taxes, the lender will perform this calculation:

($60,000 + $180,000) / 24 months = $10,000 per month in qualifying income.

However, your current income is actually $180,000 per year, or $15,000 per month. The two-year average significantly undervalues your present financial reality, reducing your borrowing power by a third. This could be the difference between qualifying for your target home in Henderson or being denied entirely.

View of a modern suburban neighborhood with well-kept homes.

Is It Legal and Safe to File an Extension to Qualify for a Loan?

Yes, it is both legal and safe. Filing for a tax extension with the IRS is a standard, routine procedure available to any taxpayer. You are not hiding income or breaking any laws. You are simply using the time legally allotted to you to file your return. A mortgage underwriter views a filed extension as a normal part of the financial process.

This strategy is about timing. By filing an extension before the April 15th tax deadline, your 'most recently filed tax returns' remain those from the previous two years. In the example above, if you applied for a mortgage in May 2024 with an extension on file, the lender would use your 2022 and 2021 returns. If your 2021 income was more stable or higher than your 2022 income, this could work to your advantage. More importantly, it allows you to use your current, higher earnings to support the application through alternative documentation.

The key is that you are not misleading the lender. You are transparently providing them with the documents required by underwriting guidelines at that specific point in time, which do not yet include your newest, unfiled tax return.

What Documents Do I Provide Instead of a New Tax Return?

When using a tax extension strategy for a Nevada mortgage, you will provide a specific set of documents that gives the underwriter a comprehensive view of your financial health. Instead of your newest tax return, your loan file will include:

Proof of a Filed Tax Extension: You must provide a copy of the IRS Form 4868 (for individuals) or Form 7004 (for businesses) that has been successfully filed. A stamp from your CPA or an electronic filing confirmation is sufficient.
Two Most Recent Filed Tax Returns: This includes all schedules (Schedule C, K-1s, etc.). If you file an extension in 2024 for your 2023 taxes, you will provide your complete, signed 2022 and 2021 federal returns.
Year-to-Date (YTD) Profit and Loss Statement (P&L): This is the cornerstone of the strategy. The P&L must be current, typically covering the period from January 1st to the most recent full month. For example, if you apply in May, the P&L should cover January 1st through April 30th. It should be prepared professionally, ideally by your CPA, and signed by you.
Business Bank Statements: You will typically need to provide two to three recent months of business bank statements to corroborate the income reported on your P&L. (The data, information, or policy mentioned here may vary over time.)

Business owner reviewing financial documents and tax forms at a desk.

How Do Lenders Verify My Current Year-to-Date Income?

Lenders don't just take your P&L at face value. They need to be confident that the income you're declaring is accurate and sustainable. The underwriter will meticulously analyze your P&L and cross-reference it with your business bank statements.

Here’s what they look for:

Consistent Deposits: The revenue figures on your P&L should align with the deposits going into your business bank accounts. If your P&L shows $20,000 in monthly revenue, the bank statements should reflect similar deposit activity. Irregular or one-time large deposits that don't match your business model will be questioned.
Reasonable Expenses: The expenses listed on the P&L should be consistent with your industry and past tax returns. A sudden, drastic drop in expenses without a clear explanation can be a red flag.
Profitability: The underwriter must be convinced that your current income is stable and likely to continue. The P&L must demonstrate sufficient profit to support the proposed mortgage payment and your other liabilities.

Essentially, the P&L and bank statements work together to paint a real-time picture of your business performance, bridging the gap left by the unfiled tax return. For a borrower in a growing market like Reno, this real-time data is far more relevant than a two-year-old average. (The data, information, or policy mentioned here may vary over time.)

Does This Strategy Work for Both Conventional and Jumbo Loans?

Yes, this strategy is viable for both conventional and jumbo loans because both loan types often adhere to the income calculation guidelines set by Fannie Mae and Freddie Mac. Since the strategy relies on following these standard underwriting rules, it's widely accepted.

Conventional Loans: This is the most common scenario. Conventional underwriting guidelines are quite specific about using the two most recent tax returns. A filed extension legally delays the availability of the newest return, forcing the use of the older documents plus the P&L.
Jumbo Loans: Jumbo lenders often have their own specific requirements, known as 'overlays', but the foundational income analysis is similar. A strong P&L demonstrating high, stable income can be very persuasive for a jumbo loan underwriter, especially for a high-value property. The key is a clean file, a strong credit profile, and significant assets.

Regardless of the loan type, it's crucial to work with a mortgage advisor who has experience with self-employed borrowers and can navigate these specific documentation requirements effectively. (The data, information, or policy mentioned here may vary over time.)

What Are the Deadlines I Need to Be Aware Of?

Timing is everything with this strategy. Missing a key date can invalidate the entire approach. Here are the critical deadlines to manage:

April 15th (Tax Day): You must file your extension (Form 4868) on or before this date. Crucially, an extension to file is not an extension to pay. You and your CPA must estimate your tax liability for the previous year and pay that amount to the IRS by April 15th to avoid penalties and interest.
Loan Closing Date: Your mortgage must close before you file your taxes. Ideally, you want to close well before the final extension deadline.
October 15th (Extension Deadline): This is the final day to file your tax return. If your loan has not closed by this date, the underwriter will require the newly filed return. If that return shows a lower qualifying income average, your loan approval could be reversed at the last minute.

Therefore, the ideal window to execute this strategy is between April 15th and late summer, giving you plenty of time to find a home, get through underwriting, and close before the October 15th pressure point.

When Is Filing a Tax Extension a Bad Idea for a Mortgage?

This strategy is not a universal solution. Filing a tax extension can be detrimental in several situations:

If Your Income is Decreasing: If your P&L shows that your current year's income is trending lower than the previous two-year average, filing the extension will hurt you. The underwriter will see the decline and may use the lower, current income for qualification, or deny the loan due to instability.
If You Need Your Tax Refund: If you are expecting a large tax refund and need those funds for your down payment or closing costs, you must file your return to receive it. An extension will delay that refund for months.
If Your Closing Is After October 15th: As mentioned, any loan closing after the extension deadline will require the newly filed tax return, making the strategy pointless.
If Your P&L Is Weak or Inconsistent: If your business income is sporadic or your documentation is disorganized, a P&L analysis may raise more questions than it answers. In this case, it's better to rely on a filed tax return.

What Should I Tell My CPA About This Strategy?

Open and honest communication with your Certified Public Accountant (CPA) is vital. Your CPA is your partner in this process, not an obstacle. Schedule a meeting and explain your goal: you are trying to qualify for a mortgage based on your current income trajectory.

Here’s what to cover:

Explain the 'Why': Clarify that you are not avoiding taxes, but strategically timing your tax filing to align with mortgage underwriting guidelines for self-employed individuals.
Request Help with the Tax Payment: Ask them to accurately estimate your tax liability for the previous year so you can make a timely payment by April 15th and avoid underpayment penalties.
Ask for a Professional P&L: Request a detailed, signed, year-to-date P&L statement. A CPA-prepared P&L carries more weight with an underwriter than one you create yourself.
Confirm the Plan: Ensure your CPA understands that they should file the extension by April 15th and hold off on filing the full return until you give them the green light after your home loan has closed.

By framing it as a financial strategy, your CPA can provide the professional support you need to present a strong and credible case to your lender. If your self-employed income has recently grown, a tax extension might be the key to your Nevada home loan. Discuss your specific scenario with a mortgage strategist to see if this approach is right for you and to ensure your documentation is prepared correctly for underwriting.

If your business income is on the rise, don't let a two-year average hold you back. Let's explore if this tax extension strategy can help you qualify for the home you deserve. Apply now to connect with a mortgage strategist today and see what's possible.

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.