Do you want to buy a home but think you won’t be able to do so as you owe back taxes to the IRS or your state tax agency?
This may not be the case, depending on how much you owe and the type of mortgage loan program you’re interested in.
Furthermore, your ability to qualify for a home loan will depend largely on the lender’s guidelines for prospective buyers with tax debt. Your credit report (with all three credit bureaus) and general credit history will also play a role in determining your eligibility for a home loan.
So, depending on your financial situation and the exact nature of the tax debt you owe, you may not have to put your home-buying plans on hold.
In this guide, you’ll discover how back taxes could affect your ability to purchase a home. You’ll also gain some insights on which mortgage lenders you should consider if you owe back taxes to the IRS or your state taxing authority.
Types Of Tax Debt Situations
Back Taxes Payment Arrangement
The IRS offers short- and long-term installment agreements to help individual and corporate taxpayers resolve unpaid federal tax debt. This type of repayment plan with the IRS will allow you to divide your total tax liability into manageable monthly payments so that you don’t have to face the burden of a lump sum payment at once.
You may also qualify for a settlement through an Offer in Compromise. State tax authorities also offer payment arrangements that let you make monthly payments toward your balance until it’s been completely paid off.
Tax Liens
Tax liens are a UCC filing that is originated by the IRS or State taxing authority but is filed with the county clerk and recorder where you live or lived previously. It can be a red flag to mortgage lenders indicating that you’ve had trouble managing your obligations in the past.
Consequently, many mortgage lenders may turn you down if you have a tax lien or may just charge a higher interest rate on the loan to offset the risk that you’ll default on your home loan. Still, you want to be transparent about your tax liens when applying for a home loan.
If possible, resolve your tax liens by paying off your back taxes before pursuing a mortgage. Or make sizable payments to demonstrate to the lender that you’re doing what you can to resolve the debt sooner than later.
Tax Levies
Although the terms tax liens and tax levies are often (incorrectly) used interchangeably, they aren’t the same. A tax lien attaches to your property and gives the Internal Revenue Service (IRS) the right to collect what they’re owed if you sell it. Typically, the home sale would need to occur before a tax lien can come into effect.
By contrast, a tax levy initiates a seizure of your assets by the IRS to settle your tax debt. This process begins with a court order allowing the federal or state government to seize the assets of a business or individual in order to recoup the unpaid taxes (or part of the total tax debt owed).
Apart from home, the assets being seized might include commercial property, bank accounts, and wages. If you’re facing a tax levy, you should consider seeking the help of a reputed tax debt relief company to understand your options and figure out how to proceed.
Other Types of Debt
Many states can seize assets to settle back taxes without going through extensive due process. So, if you have an unpaid state tax bill, you risk getting denied a home loan.
Can You Get a Conventional Mortgage If You Owe Taxes?
Unpaid tax debt doesn’t automatically prevent you from getting approved for a conventional mortgage. But the amount you pay the IRS each month will likely be included in the debt-to-income ratio (DTI), which could lower the loan amount you qualify for if you have several other debt obligations.
The mortgage lender will also require proof that you’ve made the most recent tax payment on time as well as having the tax debt issue resolved through an installment agreement with the IRS.
The payment plan usually needs to be well established, proving that it will both satisfy the debt and is a monthly payment that is manageable with your current income and expenses. This way, the lender knows that your monthly obligation to the IRS isn’t a mitigating factor in making your loan payment to the mortgage company.
Whether or not you get approved by the mortgage lender will also depend on the particular lender and their requirements, the type of back taxes you owe, and the exact amount owed to the IRS. For example, it may be harder for you to get approved for a mortgage for a new home or investment property if you owe property taxes on an existing house.
When you apply for a conventional mortgage, the lender will take your overall financial situation into account when trying to assess your suitability for the mortgage loan. Your credit score, total taxable income, credit history, tax history, and tax deductions will all be considered in this assessment.
Therefore, owing back taxes might be a mark against you. Still, there are other avenues where you could prove your suitability as a borrower, particularly if you’re taking out a mortgage for your primary residence rather than a second home.
Can You Get an FHA Loan If You Owe Taxes?
You could be eligible for an FHA loan if you owe back taxes. However, the Federal Housing Administration only insures mortgage loans provided by FHA-approved lenders, who may manually underwrite your loan application.
For this, they would request documentation that provides details on your installment agreement with the IRS, along with proof that the last three payments were made in a timely manner. Furthermore, the manual underwriting process may increase the complexity and cause some delays in the approval of your mortgage loan.
Can You Get A VA Loan If You Owe Taxes?
VA loans are offered by private mortgage companies but are backed by the federal government through the U.S. Department of Veterans Affairs (VA). These loans can be availed by active service personnel, veterans, as well as their surviving spouses.
Under this program, the Department of Veterans Affairs offers home loans at very generous terms, such as little to no downpayment, competitive interest rates, no prepayment penalties, no mortgage insurance, etc.
VA loans are available to borrowers with outstanding tax debt, assuming an IRS repayment agreement is in place and you’ve made timely payments each month for the past 12 months. It’s equally important that you disclose your tax lien when you apply (if applicable) and earn enough for your DTI ratio to remain at an acceptable level.
Can You Get a Mortgage If You Didn’t File Taxes?
When you apply for a mortgage, the lender will require tax return data (IRS Form 4506-T) before they’ll formally consider your request for a home loan. This is because mortgage companies often use income taxes and other forms of tax payments as proof of income, so not being able to provide your tax returns will cause lenders to doubt your ability to repay the loan. Hence, failing to file returns means you’ll likely be turned down for a home loan. Plus, you’ll be assessed a failure-to-file penalty by the IRS if you’re required to file a tax return but don’t do so.
Do Mortgage Lenders Check for Back Taxes?
Yes, a lender will definitely check whether or not you owe back taxes to the IRS or any other tax agency before approving your mortgage application. This is due to the fact that unpaid real estate taxes could create a tax lien on the property, limiting the mortgage company’s ability to foreclose on the property in case you default on your loan.
Until all the pending taxes have been cleared (or you’ve set up a repayment plan with the IRS and started making regular payments), lenders will be hesitant to approve your loan application, as the government will have a legal claim on any property that you buy.
This will, as mentioned before, put the lender’s investment at risk as they will not be able to foreclose on the property if needed. This is why most mortgage companies will perform a title search to ensure that the home you plan to buy is free of legal issues such as outstanding property tax bills or IRS liens.
How a Tax Relief Company Can Help You with Buying a House
The good news is you can buy a house, even if you owe tax debt. But making the process as seamless as possible will require strategic planning on your part. This could involve working with a tax professional, like an Enrolled Agent, to make arrangements with the IRS or your state tax authority to resolve unpaid tax debt. Or they could advise you on the appropriate actions to prevent a federal tax lien from being filed or how to get one removed if you are planning on buying a house in the future.
