How to buy a home if you owe taxes
If you’re in the market to buy a home while dealing with unpaid taxes, you might be wondering if your tax debt will affect your mortgage approval. While it’s possible to buy a home if you owe taxes, there are a few things you should know about getting a mortgage under these circumstances.
How owing the IRS affects buying a home
If you’re considering waiting to apply for a mortgage until your IRS or state tax debt is paid off, that may not be necessary. To understand how owing the IRS affects buying a home, it’s best to consult an experienced loan officer to guide you through loan program options based on your financial situation.
Also, be sure to let your loan officer know if you’ve been making efforts to pay off your outstanding tax debt over time through a payment plan. You’ll need to provide proof of payment history, a letter of explanation and supporting documentation.
Getting a mortgage when you owe taxes
While you don’t necessarily need to pay off your entire tax debt to get a mortgage, there are certain qualification requirements if you have unfiled taxes or a tax lien on your property.
How to qualify for a mortgage with unfiled taxes
Submitting your most recent two years of tax returns is part of the mortgage application process. If you have unfiled taxes, you’ll need to file an extension with the IRS or state government.
How to qualify for a mortgage with a tax lien
A tax lien on a home gives the government a legal claim to a portion of a property for money owed. Federal and state liens typically have to be paid in full prior to closing to qualify for a mortgage. According to the IRS, “Paying your tax debt—in full—is the best way to get rid of a federal tax lien. The IRS releases your lien within 30 days after you have paid your tax debt.”
If you haven’t yet paid off your debt, there are some exceptions to the approval requirements which allow repayment plans. These exceptions vary by the type of loan program.
Conventional home loan requirements
A Conventional loan is a non-government mortgage that meets requirements set by the Federal Housing Finance Agency (FHFA) and the funding criteria of Freddie Mac and Fannie Mae. Fannie Mae and Freddie Mac have specific qualification requirements when applying for a mortgage with a tax lien.
- Fannie Mae (FNMA)
Fannie Mae (FNMA) requires that you must pay all past-due federal or state taxes, including tax liens, in full prior to closing. This includes money owed for the most recent tax return or extension. FNMA does, however, allow IRS installment plans unless there is a Notice of Federal Tax Lien. The Notice of Federal Tax Lien is a public document to alert creditors that the government has a legal right to your property.
- Freddie Mac (FHLMC)
Freddie Mac (FHLMC) requires that the tax lien be paid off or in a repayment plan for at least three months. If the tax lien is under a repayment plan, then a payment history must be obtained. The payment must be included in the debt-to-income (DTI) calculation, along with a subordination agreement to ensure the first mortgage lien is the first lien on the home with title. The subordination lets title know that the mortgage must be in front of the tax lien.
Government home loan requirements
Unlike conventional loans, government-backed loans are guaranteed by a federal agency. They can offer benefits such as no down payment options and lower credit rating requirements. Government-backed loans also have specific qualification requirements when applying for a mortgage with a tax lien.
- VA and USDA
VA and USDA loan programs require you to pay tax liens in full or be in a repayment plan for at least three months.
FHA has different requirements based on if the federal and state tax liens are delinquent or not. Federal and state tax liens must be current, paid timely or otherwise satisfied, or in a written payment agreement and included in the DTI ratio. A minimum of three months of timely payments are required, and payments cannot be prepaid. Delinquent federal and state taxes are acceptable if it’s not a lien with an acceptable established payment plan.
Does owing taxes affect mortgage approval?
While tax debt doesn’t disqualify you from getting a loan, paying it off is the best way to increase your likelihood of mortgage approval. If you can’t pay the full amount, request an installment agreement and make timely payments to settle your debt over time. Then connect with a Guild loan officer for expert advice on the right time to buy a home.
The above information is for educational purposes only. All data, loan programs and interest rates are subject to change without notice. All loans are subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.