Owning a home is a dream for many, but if you owe the IRS, that dream can feel distant. What many people don’t realize is that tax debt can complicate the mortgage process, making lenders hesitant to approve a loan. The IRS can place liens on your property or take legal actions, signaling potential financial risk. Get help now – contact our IRS payment plan tax professionals.
But does owing back taxes mean you can’t buy a house? Not necessarily.
That said, yes, it’s possible to buy a home even with tax debt, but it certainly makes the process more challenging.
In this guide, we’ll break down the challenges and offer practical solutions to help you successfully guide the home-buying process despite owing the IRS.
How Back Taxes Become a Problem for Buying a Home?
When you owe back taxes, it can seriously interfere with your ability to get a mortgage, especially if the IRS issues a Notice of Federal Tax Lien. This is a public claim giving the IRS legal rights to your property. If a lien is placed, any proceeds from selling your home must go to paying off the IRS debt before you can handle your mortgage.
The issue becomes more difficult when the IRS records a public lien. This lien essentially tells the world that you owe the IRS money. Frankly, it is often treated as a huge red flag for mortgage lenders.
Here’s a simple breakdown of how tax debt can turn into a problem:
- You don’t pay your taxes, and the IRS sends a CP14 notice with the amount due.
- If you don’t pay, interest builds, and the IRS has a “secret” lien on your property (not public yet).
- After 10 days, you get a CP501 notice reminding you of the debt and warning of a public lien.
- Five weeks later, a CP503 notice arrived. If unpaid, the IRS may make the lien public.
- Another five weeks later, you received certified mail from the IRS with a CP504 notice, warning the IRS may seize your wages or property.
- Finally, Letter 1058 gives you 30 days to dispute the claim before the IRS can seize the property and file the lien publicly.
Once a lien is recorded, it can significantly hurt your chances of getting a mortgage, as lenders see you as a higher risk. This is why dealing with back taxes early is so important if you want to buy a home.
Also Read: What is the IRS Fresh Start Program?
Can I Buy a Home If I Have an IRS Payment Plan?
Yes, IRS payment plans and home buying can coexist, meaning you can still purchase a home while on a payment plan with the IRS, though it may complicate the mortgage approval process.
Lenders will want to see that you can manage both the mortgage and your IRS payments without financial strain. Having a formal payment agreement with the IRS shows you’re actively addressing your tax debt. This can reassure lenders.
Here’s what you need to keep in mind:
- Government-backed loan programs like those from the Federal Housing Administration (FHA) and Freddie Mac and Fannie Mae have guidelines that allow borrowers with IRS payment plans to qualify for a mortgage. These programs aim to make homeownership possible for those with tax debt, provided you meet certain financial standards.
- You still need to demonstrate that you can afford the mortgage along with your tax obligations. This means having enough income to comfortably cover both your IRS payments and monthly mortgage installments.
While IRS payment plans and home buying can present some challenges, being proactive about managing your tax debt can significantly improve your chances of approval.
How Do Lenders Know If You Owe Back Taxes?
Lenders can find out about your tax debt through a few different methods:
- Reviewing Tax Returns: When you apply for a mortgage, lenders look at your recent tax returns. They can notice if there are discrepancies between what you owe and what you’ve already paid.
- Title Search: Lenders run a title search on your property, which will reveal any public tax liens. If you owe back taxes, a Notice of Federal Tax Lien will show up during this search.
- Public Record Searches: Lenders also check public records, and any federal tax lien will appear in these reports during the mortgage process.
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Factors Lenders Consider with Back Taxes
Even if you owe back taxes, there are steps you can take to improve your chances of mortgage approval. Lenders will look at other aspects of your financial profile, including the following key factors:
- Credit Score: Maintaining a strong credit score is essential, even with tax debt. If you are making regular payments to the IRS as part of a payment plan, this demonstrates financial responsibility. A positive credit history reassures lenders that you’re actively managing your obligations, which can offset the negative impact of tax debt.
- Debt-to-Income Ratio (DTI): Lenders assess your DTI ratio to determine how much of your income goes toward paying debts. This includes any payments you make under an IRS installment plan. Keeping your other debts in check and maintaining a manageable DTI will make you a more attractive mortgage candidate, as it shows you can handle additional debt.
- Financial Documentation: Lenders require comprehensive financial documentation during the mortgage process. Be prepared to submit proof of income, past tax returns, and records of your IRS payment plan. Demonstrating that you’re making consistent progress on your tax debt helps show lenders that you’re capable of managing your financial responsibilities, making it easier for them to consider approving your mortgage.
It’s always best to disclose any unpaid taxes early in the application process. This allows lenders to assess your situation fully and provide guidance on the best way to proceed.
Steps to Address Your Back Taxes
If you have piling back taxes, here’s what you need to do:
- Assess Your Tax Situation: The IRS offers a variety of options to settle your tax debt, such as installment plans, offer in compromise, or currently not collectible status. Consulting with a tax expert can help you navigate which option suits your circumstances best, ensuring you’re taking the right steps towards resolution.
- Set Up a Payment Plan: If you’re unable to pay your full tax debt upfront, consider arranging a payment plan with the IRS. A consistent payment history signals to lenders that you are serious about managing your obligations, and improving your chances of mortgage approval.
- Seek Professional Tax Help: If your tax situation is complicated or the amount owed is substantial, it’s wise to seek guidance from a tax resolution expert. They can assist with negotiations, explore potential options for debt reduction, and even work on removing liens under certain conditions.
- Request a Lien Discharge: If you already have a tax lien on your property, you can request a Certificate of Discharge from the IRS, allowing you to sell your home or refinance while still working on your tax payments.
Final Thoughts!
If you’re hoping to secure a mortgage while owing back taxes, understand that lenders may consider you a higher-risk borrower. This typically results in higher interest rates and larger down payments, making the process less favorable. However, exploring alternatives like Federal Housing Administration (FHA) loans or private lenders can provide more flexible options, though they come with their own conditions.
To improve your chances, prioritize addressing your tax debt through an IRS or state tax payment plan. This not only reassures lenders but also helps you navigate the home-buying process with fewer hurdles.
Seeking tax help from a professional tax consultant can also make the process smoother and potentially reduce the financial burden. Get in touch today!
