Learn How Tax Liens Affect Your Ability to Get Approved for Loans
If you’re struggling with unpaid taxes in Mississippi, you’ve probably heard the same warning from people close to you: a tax lien will tank your credit score. That fear is enough to keep many taxpayers up at night, worrying about their ability to get new lines of credit, refinance their home, or use credit effectively to pay off tax debt.
However, that’s no longer true. Tax liens do not affect your credit score or credit report, but they do impact your ability to get credit.
There’s a lot of nuance to this topic, and it’s important to understand how tax liens do and do not affect your finances. Ready to take control of your tax debt and stop worrying about liens and levies? Call Damiens Law at 601-873-6510.
Key Takeaways
- Tax liens no longer appear on credit reports, so they don’t affect your credit score.
- However, lenders may still be able to see both IRS and state tax liens as they are public records.
- When reviewing loan applications, underwriters will typically find your tax liens, and they will affect your ability to get loans.
- Resolving a tax lien as soon as possible can help you protect your finances.
- A tax attorney can help you deal with tax liens if you’re trying to take out a loan.
Do Tax Liens Show Up on Credit Reports?
As of 2018, tax liens are no longer included on your credit reports. They used to be on Experian, TransUnion, and Equifax credit reports. Changes were implemented in 2017 and finalized by mid-2018.
However, it’s important not to oversimplify this. Even though tax liens do not show up on credit reports or affect your credit score, they can still have an impact on your ability to obtain credit.
Why Tax Liens Create Confusion About Credit Damage
There’s a lot of confusion around this topic, largely because tax liens were included on credit reports for so long. Even though they haven’t appeared on credit reports for over seven years, outdated advice is persistent, and well-meaning people continue to spread this misconception around.
This confusion can hurt taxpayers in different ways.
- A misinformed belief that you can’t get loans: A taxpayer who believes their tax lien is harming their credit may not even look into using their credit to pay off their tax debt—for example, by taking out a low-interest home equity line of credit (HELOC) or by refinancing their home.
- An incorrect assumption that liens don’t matter if they’re not on your credit report: On the flip side, a taxpayer who has a tax lien but doesn’t see it on their credit report may assume it’s not a big deal, resulting in them not taking action to pay off their tax bill.
- Finding out about tax liens during the underwriting process: If a taxpayer isn’t aware of the tax liens, they may apply for a loan and not disclose the lien, but then, they get a big surprise when the underwriters come back with a loan rejection or poor terms due to tax liens.
Credit Scores vs. Lender Underwriting
Credit reports and credit scores are important parts of securing credit, but that’s not all you have to think about. Your credit score is a single number based on various types of data provided by lenders. It’s based on:
- number of accounts,
- how much you owe,
- what types of debt you have,
- how often you pay on time,
- how old your accounts are,
- and other factors.
A credit score’s sole goal is to tell lenders how likely you are to pay back what you owe. Some types of credit, such as certain types of credit cards, don’t require anything but a credit score and a credit report pull. So, there’s a chance some lenders may approve your loan and not even realize you have a tax lien.
However, that’s rare – most loans and credit cards require lender underwriting, especially mortgages and other large loans. Underwriting is far more extensive than looking at a credit score and report. During the underwriting process, lenders want to gather as much information as possible about your ability to repay the loan and the risks of lending to you.
In addition to what you’ll find on a credit report, underwriters look at:
- Unresolved tax liens.
- Other government claims, with legal priority – for example, liens for unpaid child support.
- Public records affecting repayment or collateral.
- The source of down payments – typically, to verify that you haven’t borrowed the money.
A borrower may have a perfect credit score but still be denied if a lender sees that they have a massive outstanding tax lien.
IRS and Mississippi Tax Liens as Public Records
Both state and federal tax liens are still recorded as public records, so any lender wanting to get a better understanding of your finances can easily pull up tax liens.
- Federal tax liens are filed by the IRS as a Notice of Federal Tax Lien (or NFTL).
- In Mississippi, tax liens are recorded on the State Tax Lien Registry. Individual tax liens automatically attach to all of an individual’s property owned or acquired throughout the state, while business liens attach to business property.
You should expect mortgage underwriters, mortgage refinance underwriters, business loan officers, and other professionals who oversee large loans to pull up this information in their searches.
Indirect Ways Tax Liens Affect Borrowing
Although tax liens do not have a direct effect on taxpayers’ credit scores, they can still affect borrowing outcomes in a variety of ways.
Loan Denials and Conditional Approvals
Some lenders won’t approve loans at all while there are unresolved tax liens. Others may approve loans, but make approval contingent on resolving the tax lien before the loan is funded. In both cases, the borrower may be unable to borrow what they need or may have to jump through additional hoops.
Higher Interest Rates
Lenders may be willing to take a risk on a lender with a tax lien, but they have to protect their money. That may mean higher interest rates and shorter terms, resulting in higher monthly payments. When this happens, even a great credit score may not be able to qualify you for better terms.
Reduced Borrowing Limits
Lenders may also protect their funds by limiting what they lend you. This can affect both the loan and your credit score. For example, a home lender may be willing to loan you some money, but not enough to get your dream home – even if your credit score and income are enough to qualify you. Or say a credit card company gives you a card with a relatively low balance. As a result, your normal monthly spending may lead to a higher credit utilization rate, which will lower your credit score.
Delays in the Lending Process
Public record issues may slow down underwriting, leading to delays in approvals, closing, and refinancing timelines. If you get approved contingent on dealing with the tax lien, you’ll have to deal with extra paperwork and wait for the IRS or your state revenue agency to respond to your requests.
How Lenders Evaluate Risk Beyond Credit Score
From a lender’s perspective, a tax lien signals major unresolved financial obligations. Lenders know that tax liens generally take priority over any private liens filed after the tax lien, which may make them wary of lending a borrower money.
Lenders may be concerned about:
- The government’s legal right to collect before the lender, which may result in the lender not being able to back the loan with collateral.
- Enforcement actions that may disrupt a borrower’s repayments – for example, if the IRS garnishes your wages due to an unresolved tax debt, you may struggle to repay the loan.
- The potential for more unpaid taxes in the future and the lien increasing – lenders know that tax troubles from previous years often indicate a higher risk of unpaid taxes in the future.
These worries stand even if a borrower is making payments on other debts or making progress on their tax debt. If the IRS suddenly decides to collect on a tax lien, it could leave other creditors in the lurch.
Federal vs. Mississippi Tax Liens
You may find that borrowers view federal and Mississippi tax liens differently. Here are some reasons why:
- Enforcement: Both the IRS and the Mississippi Department of Revenue have broad tax collection powers, but lenders may be more worried about the IRS’s authority to collect tax debts.
- Scope of the lien: Federal tax liens attach to anything a taxpayer owns anywhere in the country, including real estate, personal property, and future assets a taxpayer may acquire. Mississippi tax liens often only attach to assets in Mississippi, unless the DOR has a reciprocity agreement with another state.
- Duration: IRS tax liens typically last 10 years, while MS tax liens are active for seven years.
Whether you have a federal tax lien, a state tax lien, or both, you should expect lenders to want clarity and a path to resolution before they proceed.
What About Installment Agreements?
Qualifying for an installment agreement can give taxpayers a big sigh of relief, but an installment agreement doesn’t necessarily fix tax lien concerns. If your tax debt is sizable, the IRS may file a tax lien to protect its interests, even if you set up payments. Additionally, if you don’t set up payments promptly, the IRS may file a lien before you set up payments.
At that point, you can generally only get the tax lien withdrawn from the public record if you:
- owe under $25,000
- Set up payments to pay off the debt within five years.
- Make payments by direct debit.
- Pay three months on time.
Even if you do have a lien in place with an installment agreement, your payment plan may still help you. Being up-to-date on your payment plan indicates a reduced risk of enforcement actions and proactive financial management.
Options for Resolving Tax Liens
How a lien is handled can impact your borrowing options, so it’s important to work with a tax professional to better understand your options.
- Pay in full: Your first option is to pay the lien in full, which leads to a lien release. However, this can still leave a paper trail of the lien, unless you request a withdrawal and the IRS or state grants your request.
- Request a withdrawal: A lien withdrawal completely removes the lien from public records. You may be able to get the lien withdrawn if you pay in full or set up a qualifying payment plan as explained above.
- Ask the IRS to subordinate the lien. That means that the IRS lowers the priority of their lien to allow a newer lien to take precedence. Subordination can help you get collateral-based loans, such as refinancing your home.
- Get the lien discharged. The IRS may agree to discharge the lien from a specific piece of property, potentially allowing you to sell or borrow against the property.
However, the best option depends largely on your specific circumstances and eligibility.
Why You Should Work With a Tax Professional to Resolve Tax Debt
There’s no question that resolving your tax debt improves your overall financial stability and flexibility. Properly resolving liens can improve your approval odds, dramatically lower your stress during underwriting, expand your refinancing and equity access options, and make it easier to make long-term financial plans.
Working with a tax professional helps you fully understand your options when it comes to your tax lien, avoid direct (and stressful) communication with the IRS or DOR, and come up with a plan that keeps you compliant and allows you to pursue your financial goals.
If your tax lien is holding you back financially, let’s talk about your next steps. Call Damiens Law at 601-873-6510 or send us a message online to set up a discovery call.
Frequently Asked Questions
Do tax liens show up on credit reports?
No. The three main credit bureaus implemented changes in 2017 and 2018 so that tax liens no longer show up on credit reports.
How long does a tax lien affect your credit score after being paid off?
Tax liens do not affect your credit score, so paying off the tax debt underlying the lien will not improve your score. However, resolving the lien will typically improve your borrowing options.
Does a tax lien affect me when I’m applying for credit?
Yes, it generally does. Tax liens are public record, so underwriters and lenders can see them and use them in their decision-making process. Unresolved tax liens can lead to loan denials, unfavorable loan terms, or additional requirements, such as the requirement to get lien subordination.
Is my IRS installment agreement on my credit report?
IRS installment agreements are not on credit reports, but if the IRS still files a federal tax lien, lenders can access it. Many loan applications require you to disclose all of your debts, meaning you must tell the lender about your installment agreement.
Sources:
https://www.dor.ms.gov/news/state-tax-lien-registry
https://www.experian.com/blogs/ask-experian/tax-liens-are-no-longer-a-part-of-credit-reports/
https://www.taxpayeradvocate.irs.gov/notices/lien-subordination/
https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien
https://www.irs.gov/newsroom/what-if-there-is-a-federal-tax-lien-on-my-home
https://www.irs.gov/pub/irs-pdf/p1450.pdf
https://www.irs.gov/irm/part5/irm_05-012-009
