Written by: Thomas Brooks
Published: May 19, 2025
Can You Buy a House If You Owe Taxes? A Guide to Mortgage Approval with Tax Debt
Buying a home is one of the biggest financial decisions most people make. However, if you owe back taxes, you may feel like this dream is out of reach. The good news is that having tax debt doesn’t automatically disqualify you from buying a home, but it can complicate the process.
Lenders will review your tax situation as part of the mortgage approval process, and the type and amount of debt you owe can influence their decision.
Can You Buy A House If You Owe Taxes?
The short answer is yes, you can buy a house if you owe taxes. However, there are certain conditions and steps you need to take to ensure you are eligible for a mortgage.
Lenders evaluate your financial situation comprehensively when reviewing your application, and tax debt is an essential part of that assessment. While having outstanding taxes may not immediately disqualify you from mortgage approval, it can pose challenges depending on the type of tax debt and how well you manage it. The more proactive you are in addressing your tax situation, the better your chances of securing a mortgage.
How Does Tax Debt Impact Mortgage Approval?
Mortgage lenders generally assess several factors when deciding whether or not to approve a loan application, including your credit score, income, employment history, and debt-to-income ratio (DTI). When you owe taxes, lenders will consider the following aspects:
- Tax Liens: If the IRS or state tax authority has filed a tax lien against you, it can severely affect your ability to get a mortgage. A lien indicates that the government has a legal claim on your property to settle the tax debt. Lenders typically view this as a red flag, as it suggests you may not be financially responsible. A tax lien can remain on your credit report for years, potentially preventing mortgage approval until it is resolved.
- Unpaid Taxes: If you owe taxes but haven’t had a lien placed against your property, lenders will consider whether you are actively working to pay off your tax debt. If you’re paying the debt in installments through an IRS payment plan, some lenders may still approve your mortgage, but the loan approval process might take longer.
- Your Payment History: Lenders are more likely to approve a mortgage if they see that you’ve been consistently making payments toward your tax debt. Proactive steps such as negotiating a payment plan with the IRS or state tax authority show that you are responsible and willing to address your financial obligations.
- Tax Refunds: If you’re expecting a tax refund, this could work in your favor. Lenders might view your refund as a potential source of additional income to help pay off the tax debt or contribute to your down payment.
What Are the Types of Tax Debt That Can Affect Mortgage Approval?
Not all tax debt is treated the same way. Different types of tax debt may have different impacts on your mortgage application:
- Federal Tax Debt: Federal taxes, such as income tax, can affect your credit score and may result in a lien if unpaid. The IRS will place a lien on your property to ensure the debt is paid. If a lien is in place, it will be more difficult to get a mortgage.
- State Tax Debt: Just like federal tax debt, state taxes can result in liens if unpaid. However, state taxes are often easier to negotiate than federal taxes, depending on your location. Some states are more lenient than others when it comes to working out a repayment plan.
- Self-Employment Taxes: If you’re self-employed, the IRS expects you to pay self-employment taxes (Social Security and Medicare taxes). Failing to pay these taxes can result in significant penalties, liens, and other financial consequences, which can directly impact your ability to qualify for a mortgage.
- Back Property Taxes: If you owe property taxes, the local government may place a lien on your property. Back property taxes can prevent you from selling the home or using it as collateral for a loan. Paying off these taxes is essential for mortgage approval.
Can You Buy A House If You Owe Back Taxes?
Owing back taxes doesn’t automatically disqualify you from purchasing a home, but it can complicate things. It’s crucial to know how back taxes will impact your home loan application and take the necessary steps to improve your chances of getting approved.
Here are a few strategies to help you buy a house despite owing back taxes:
1. Pay Off the Tax Debt
If possible, the best way to resolve tax debt issues before applying for a mortgage is to pay off the taxes you owe. This removes any tax liens and eliminates potential obstacles in the mortgage approval process. You may consider using savings, tax refunds, or even a personal loan to pay off the debt.
2. Set Up a Payment Plan with the IRS
If paying off your tax debt in full is not possible, consider negotiating a payment plan with the IRS or state tax authority. A formal agreement shows lenders that you are taking steps to resolve your tax debt, which may improve your chances of mortgage approval. Make sure that the payment plan is current and that you are adhering to the terms before applying for a mortgage.
3. Work with a Tax Professional
If you’re unsure how to handle your tax debt or need help negotiating a payment plan, it’s a good idea to consult a tax professional. They can guide you through the process and help you develop a strategy for addressing your tax debt in a way that doesn’t interfere with your home-buying goals.
Mortgage With Debt: What Are Your Options?
If you’re considering applying for a mortgage while carrying tax debt, there are several mortgage options to explore:
- Conventional Loans: Conventional loans are offered by private lenders and may be more difficult to qualify for if you have significant tax debt. However, if your tax debt is manageable and you’ve set up a repayment plan, you may still be eligible for this type of loan.
- FHA Loans: Federal Housing Administration (FHA) loans are typically more flexible when it comes to credit and financial requirements. FHA loans may be a good option for buyers with tax debt, especially if you’ve made consistent payments on your tax debt or have a smaller tax obligation.
- VA Loans: If you’re a military veteran or active-duty service member, a VA loan may be an option for buying a home. While VA loans have specific requirements, they may offer more flexibility in terms of financial challenges, including tax debt.
- USDA Loans: If you’re buying a home in a rural area, you may qualify for a USDA loan. USDA loans are also generally more lenient than conventional loans, which could benefit you if you owe taxes.
What To Do If Your Mortgage Application Is Denied Because of Tax Debt
If your mortgage application is denied because of your tax debt, don’t give up on your home-buying goals. Here are a few steps you can take:
- Appeal the Decision: If you believe your tax situation is being viewed too harshly, you can appeal the decision with your lender. Provide evidence of your tax debt repayment plan and any efforts you’ve made to resolve the issue.
- Reapply After Paying Off Debt: If your application was denied because of a tax lien or unresolved debt, consider reapplying after you’ve paid off or resolved the debt.
- Consult a Mortgage Broker: A mortgage broker can help you understand what other lenders might be willing to work with you, and they can provide advice on navigating your tax debt.
Conclusion
In conclusion, the answer to the question, “Can you buy a house if you owe taxes?” is yes, but it depends on the type and amount of tax debt you have and how well you’ve managed it. While having back taxes or tax liens can complicate your mortgage approval, there are steps you can take to improve your chances of homeownership.
By paying off your tax debt, setting up a payment plan, and working with a tax professional, you can increase your chances of securing a mortgage. Understanding your options and proactively managing your tax situation will make the home-buying process smoother, even if you owe back taxes.
If you’re struggling with tax debt and need help navigating the mortgage process, consult with professionals like Tax Relief Helpers to ensure you have the right guidance in securing the home of your dreams.