Buying a House With IRS Tax Debt

Yes, you can still buy a home if you owe taxes. Tax debt is not a deal breaker, but it can complicate the mortgage application process. Depending on your situation, you may need to file tax returns, set up payment plans, or deal with tax liens.

The situation can be very complex, and working with a tax professional is always the safest route. Let’s consider your options and various important issues that come into play if you’re trying to buy a house and have tax debt.

Key takeaways

• You can get a mortgage if you owe back taxes.
• However, lenders will generally not work with you if you have unresolved tax debt – you must be in a payment plan. 
• Tax liens can also complicate approvals – but the IRS may subordinate the lien or withdraw it if you meet certain conditions. 

Identifying the Issue: Tax Lien or Tax Debt?

Before we go any further, you need to understand the difference between a tax lien and tax debt.

• Tax debt – Unpaid taxes owed to the IRS after filing your income taxes. This can happen when you’re unable to pay your tax bill in full, or if the IRS assessed tax for a year you have unfiled taxes. 
• Federal tax lien – A claim made by the IRS or state government against your property when you owe a tax debt. A tax lien can greatly impact your ability to buy a house, and dealing with it should be a priority if you’re planning on becoming a homeowner.

How Tax Debt Affects Mortgage Approval

Lenders often consider tax debt as a sign of financial irresponsibility or hardship, but they also know that people end up owing taxes for all kinds of reasons, so they mainly want to see that a resolution is in place. 

Here’s how tax debt may affect your mortgage application. 

• Unresolved tax debt – lenders will not approve you if you owe unsolved taxes. 
• Active installment agreement – the lender will consider your monthly payments in your debt-to-income ratio, which is your income compared to monthly debt payments. 

The type of mortgage also matters. For instance, if you’re applying for a conventional loan, you might face stricter requirements. Conventional loans are usually issued by private lenders, and they often have stricter credit score and debt-to-income ratio requirements than government-backed loans, such as FHA loans or VA loans.

How Does a Federal Tax Lien Affect Buying a House?

Tax liens don’t affect your credit score, but they do attach to all your property. This means that if you do manage to buy a house while a tax lien is still in effect, the house will automatically have the lien attached to it.

Most lenders will not approve a mortgage application while there’s an active tax lien. The presence of a lien indicates to mortgage lenders that their claim on the property may not be first in line, as the government’s claim would come first in the event of a sale. 

Here are the two main options:

• Lien subordination – convince the IRS to subordinate its lien, meaning the IRS lien falls behind the lender. 
• Lien withdrawal – the IRS may withdraw the lien from the public record if you set up payments and owe under $25,000, can pay off the balance in five years or less, and make three consecutive monthly payments.

How Do Lenders Know You Owe Taxes?

Mortgage lenders will discover that you owe taxes through:

• Form 4506-C IVES Request for Transcript of Tax Return – Lenders routinely file this form to get transcripts of your tax returns, which show whether or not you’ve paid. 
• Mortgage application – The application asks about all your debts, and you should include your tax debt. 
• Lien searches – Tax liens are public records, and they will show up in the underwriting process when you apply for a mortgage. 

If you’re in this situation, talk with an experienced tax attorney. They can provide advice tailored to your unique circumstances, helping you navigate the process and work towards your goal of homeownership.

Is It Possible to Get an FHA Loan With Back Taxes Owed?

Yes, but only if you are making payments on an IRS installment agreement or the IRS has agreed to let you delay making payments. 

The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development, provides mortgage insurance on loans made by FHA-approved lenders.

These loans are popular with first-time homebuyers due to their low down payment requirements and more lenient credit score standards. The FHA has clear guidelines for applicants with delinquent federal tax debt. To be eligible for an FHA loan, you must either:

1. Have entered into a valid repayment agreement with the Internal Revenue Service and made at least three months’ worth of timely payments
2. Have received permission from the IRS to delay payment on the tax debt. For example, you had your account marked as currently not collectible. 

The lender will need to verify this information during the underwriting process. 

Can You Get a Conventional Loan With a Tax Debt?

Yes, but only if you’re making payments. You’ll also need to get all tax liens subordinated or withdrawn. 

Conventional loans are mortgages not guaranteed by the federal government. They are often considered more challenging to qualify for because they generally require higher credit scores and larger down payments.

Tax debt complicates these loans, but doesn’t make them impossible to get. However, just like with FHA loans, having a payment plan in place can make a significant difference. If you’re current on your payment plan and can demonstrate that you can handle both the plan payments and your potential mortgage payments, lenders may consider your application. They’ll also consider your assets. 

FHA Vs. Conventional Mortgages When You Owe Taxes

Can You Get a VA Loan With Tax Debt?

Yes, but again, only if the debt is on a manageable payment plan, you take care of the tax lien (withdrawal or subordination), and you meet the other criteria to qualify for a VA mortgage. 

Can You Buy a House If You Owe State Taxes?

State tax debt can also impact your ability to buy a house. The key lies in having a structured payment plan with the state tax authority and applying for lien withdrawal or subordination if needed. 

Demonstrating that you’re actively handling your state tax liability can increase your chances of securing a mortgage loan.

Tips for Buying a Home When You Owe Taxes

When facing tax debt and seeking to buy a house, it’s essential to have a comprehensive plan. Keep these tips in mind:

• Consider your current financial situation, but also your future financial responsibilities, including potential mortgage payments and payments on the tax debt.
• Figure out how much you owe and set up payments, or talk to a tax attorney about relief options. 
• Calculate your debt-to-income ratio when agreeing to payment plans. 
• Find out if the IRS has filed a tax lien, and think about subordination or withdrawal.
• Learn how tax debt and liens affect different types of mortgages.
• Consult with a tax attorney to figure out the best options. 

Set up a Payment Plan with the IRS

If you have tax debts, agreeing to a payment plan with the IRS can significantly improve your chances of obtaining a mortgage. An installment agreement allows you to make manageable monthly payments towards your tax liability, demonstrating to lenders that you’re actively addressing your tax issues.

How Federal Tax Liens Affect Selling Your Home

A federal tax lien on a home can make selling the property more complex because the lien needs to be resolved before transferring ownership. If you can pay in full, that’s the easiest option; otherwise, you’ll need to get IRS approval for the following options:

• Pay lien with sale proceeds – Upon the sale of your home, the proceeds will go towards settling the tax lien before you receive any funds. 
• Discharge the lien – In some cases, the IRS might agree to discharge a tax lien (remove it from your home) to allow the sale to proceed, but you’ll still be responsible for the remaining tax debt.

Both options typically require the assistance of a tax professional.

Tips for Selling a Home with a Lien

If you need to sell your home and you have a lien from the IRS, consult with a tax professional. Also, consider these tips:

• Contact the IRS or state to learn about lien resolution options – but remember, they work for the government. If you hire a tax attorney, they work for you. 
• Disclose the Lien to Potential Buyers – Being upfront about the lien can help avoid potential issues down the line.
• Choose Your Real Estate Agent Carefully – Work with a real estate agent who is experienced in selling homes with liens. They can provide valuable guidance and support throughout the process.

How Tax Debt Affects Refinancing a Home Loan

If you owe taxes and are looking to refinance your home, you may encounter some hurdles. Similar to the initial mortgage approval process, most lenders will consider your current tax situation during refinancing.

• Unresolved debt – will typically block approval for refinance.
• Tax debt on approved payment plan – lender takes payments into account when calculating your debt-to-income ratio. 
• Tax liens – will need to be withdrawn or subordinated. The IRS may only agree to subordination if you use the funds to pay off your tax debt. 

While owing taxes can create challenges when trying to buy or sell a home, it’s not an insurmountable hurdle. With the right plan, professional advice, and active steps to address your tax debt, homeownership can be within reach. To learn more and get the help you need to buy a house, contact us at Damiens Law Firm, PLLC right away at (601) 873-6510. 

We know how stressful dealing with the IRS can be, and we can help!

FAQs about buying homes with tax debt

Can you buy a house if you owe back taxes but have a payment plan?

Maybe, and often, yes. It depends on the lender and the rest of your financial situation. However, a payment plan greatly increases your chances of loan approval, while having unresolved tax debt generally makes it impossible to get a loan. 

How do mortgage lenders verify tax debt with the IRS?

Lenders usually request a transcript from the IRS. They use Form 4506-C to request info on the returns you’ve filed and payments you’ve made. Also, tax liens will show up during the underwriting process. 

Can you get an FHA loan with an IRS installment agreement?

Possibly – but only if you’ve made at least three consecutive payments and the tax debt doesn’t make your debt-to-income ratio too high. You also need to ensure that a tax lien hasn’t been filed, and if so, you may need to work with a tax attorney to get it withdrawn. 

Can you buy a house if you haven’t filed taxes yet?

Usually not. Most lenders require two years of returns, especially if you’re self-employed. However, you may be able to get a mortgage with just one year’s tax return or by working with a lender who’s willing to accept alternative types of income verification – for example, W-2s, bank statements, or business records. 

Will an IRS tax lien attach to a new home purchase?

Yes, tax liens attach to all current and future assets. That’s why most mortgage lenders will not work with you if you have active tax liens. However, if you buy a home in cash or receive it as a gift or inheritance, the lien will attach to it.