If you’re thinking about buying a house, you’ll know that your finances are about to be heavily scrutinized. And if you have outstanding tax debt, you may be wondering if that debt will impact your mortgage application.
There’s no doubt that tax debt makes buying a house more complicated. And depending on the extent and status of your tax debt, it may make it impossible.
However – the good news is that you can still buy a house if you owe taxes to the IRS. But there are several things you will need to do and consider first, the most important of which is to prove that you are taking your tax debt seriously.
In this article, we’ll explain exactly how owing back taxes to the IRS can impact your ability to buy a house, and the things you can (and should) do to improve your chances.
But in short, if you want to buy a property but have unpaid tax debt, your first step should be to speak to tax professionals who can help you manage and resolve your debt with the IRS.
How tax debt affects your ability to buy real estate
Mortgage lenders approve or reject home loan applications based on the risk of lending to you. They assess this risk by carefully reviewing your financial profile and judging three main things:
- Your financial ability to meet the monthly repayments.
- The likelihood of you defaulting on the loan.
- Their ability to recoup the money if you default.
This means there are three main aspects to consider when it comes to how owing taxes will impact your buying a house:
- How your tax debt affects your overall debt-to-income (DTI) ratio, whether you can afford (and/or meet the requirements of) the home loan as a result, and what rate you will subsequently be offered.
- How you have dealt with your tax debt, and what that says about you as a responsible (or not) borrower.
- If the lender will be first in line to reclaim your property if you default, or if the IRS will have first dibs.
Essentially, tax debt that is unresolved, ignored, or substantial is likely to be a problem. But tax debt that you are dealing with responsibly? Much less so.
If you have a tax debt that you are already dealing with – i.e. you have a payment plan in place with the IRS and are paying it off – this will prove to the lender that you are responsible with your debts and make your tax debt much less of a problem overall. As long as your DTI ratio and other finances meet the lender’s requirements, there’s no reason you shouldn’t be approved.
However, unresolved tax debt signals that you are a high-risk borrower as it indicates financial irresponsibility. If the tax debt has escalated to the point of a lien being placed on your property, this is even more serious and will drastically hamper your ability to secure a mortgage.
It’s always worth paying off your tax debt and getting your finances in order before trying to buy a house, if at all possible. At the very least, you will need to be able to prove that you are working with the IRS to address your tax debt. Tax Relief Helpers can assist you with this – negotiating settlement agreements, payment plans, tax lien removals, and more, with the IRS on your behalf.
Can you buy a house with a tax lien?
In theory, yes – you can still buy a house with a tax lien in place. But it’s much harder, and much less likely.
If you have an existing IRS payment plan agreement and a good history of meeting the payments, and if all your other finances stack up, it is possible to be approved for a mortgage with a tax lien in place. This includes loans from the FHA, if you have an IRS payment plan and meet all their other conditions.
However, it’s always best to deal with a tax lien before trying to buy a house.
A tax lien is a result of tax debt that has been ignored for too long. It’s one of the first stages of the IRS sending you to collections, and essentially alerts other creditors that the government has a formal and legal claim against your assets – including any new assets.
A tax lien therefore means the IRS would have first dibs on your property if you were to default on your loan. This makes the risk to a mortgage lender significant, as they would lose the ability to recoup their losses. As a result, most lenders will not approve a mortgage if an active tax lien is in place.
The best way to remove a tax lien is by paying off your debt in full, but there are other ways to remove a lien or reduce its impact if this isn’t possible.
Negotiating the removal of tax liens on your own can be very complex and confusing, but the team at Tax Relief Helpers can help you through the process and handle all negotiations with the IRS on your behalf.
How do lenders know you owe taxes?
Lenders take on a considerable amount of risk when approving a home loan, so it stands to reason that they need to examine your overall finances and credit history in detail.
IRS tax liabilities no longer show up on consumer credit reports. However, if a tax lien has been filed this becomes public record, and as such will show up when lenders do a public search.
Most lenders also require you to provide your most recent tax returns (and several years’ worth if you are self-employed). From these, they will be able to see if you have any tax debt, and will then request further information from you accordingly.
You’ll also be required to provide detailed information about your overall finances when making your home loan application, which includes details of any outstanding debts – including tax debt – and any IRS payment plan agreements you have in place. Failure to accurately disclose any information essentially constitutes loan fraud.
So in short, you are legally required to tell lenders about any tax debt you have.
Can you get an FHA loan if you have tax debt?
A Federal Housing Administration (FHA) loan is a type of mortgage that is backed by the federal government, and designed to help low- to moderate-income borrowers purchase a home.
These loans have more lenient requirements in terms of credit scores and minimum down payments, making them popular with first-time buyers and people with trickier finance histories.
The good news is that it is possible to get an FHA loan if you have tax debt, including if you have a tax lien in place. And the guidelines on this are very clearly defined.
You can still qualify for an FHA loan if you have delinquent federal tax debt, as long as you have either:
- An IRS payment plan agreement in place, plus a minimum of 3 months’ history of timely payments, or
- Formal permission from the IRS to delay your payment on your tax debt.
The FHA and IRS payment plans are often the best combination of options for people with outstanding tax debts who want to buy a house. However, bear in mind that there are other specific requirements to qualify for an FHA loan that you will also need to meet.
Tips for buying a house if you owe taxes to the IRS
Buying a house if you owe federal taxes isn’t impossible, but it is harder. However, owing money to the IRS is also not something that you want to ignore, as we can guarantee you that it won’t ever simply go away.
Here are your best options if you’re wanting to buy a house but have federal tax debt:
- Don’t ignore it! This will all but guarantee that you’ll be denied a mortgage, plus your IRS tax debt will escalate into far worse problems.
- Pay off your debt in full, if possible. Having zero tax debt will make your home purchase much easier and you will be offered far better rates by lenders. If paying off your debt in full before you look to buy a property is an option, it’s highly recommended.
- Engage with the IRS to settle your debt in other ways. If paying it off in full isn’t possible, dealing with your tax debt responsibly is the next best option. This proves you are a responsible borrower and increases your chances of securing a home loan. There are a number of different ways to settle back taxes, including:
- Setting up an Installment Agreement with the IRS
- Applying for an Offer in Compromise
- Applying for Currently Not Collectable status
- Negotiating for tax liens or levys to be removed
- and more…
- Consult a professional tax resolution firm. While it is possible to liaise with the IRS directly to resolve your tax debt, working with a professional firm is always recommended to ensure you reach the best outcome. Tax resolution is complicated, and knowing the best solutions – and negotiating the best outcomes – comes from many years of experience and expertise.
- Make sure the rest of your financial history is excellent. Build up a history of responsible financial behavior by using and paying off credit cards, maintaining a low debt-to-income ratio, keeping your spending low, etc.
Negotiating payment plans and other tax resolution agreements with the IRS
If you’re desperate to get on the property ladder but have unpaid tax debt, don’t worry. You can buy a house if you owe taxes; you just have a few more things to do and consider.
If you’re unable to pay off your federal tax debt in full before you buy a house, your best option is to negotiate a payment plan or other tax resolution agreement with the IRS.
We know that this can feel overwhelming and intimidating, but it doesn’t need to be.
At Tax Relief Helpers, we have decades of experience in handling federal tax relief resolutions. Our expert team will explain all of your options, help you identify your best solution, speak to the IRS on your behalf, and negotiate settlements for your back taxes that will save you considerable time, stress, and money. And once we’re done, you’ll be in the best possible position to succeed in your dream of buying a house.
Contact us today to get the ball rolling on resolving your tax debt and purchasing that dream home.