When applying for a mortgage, it’s crucial to understand how outstanding debts, including tax obligations, can impact your loan approval. This article delves into the relationship between tax debt and mortgage underwriting, providing insights into how lenders assess tax-related information and the potential consequences of unpaid taxes on your home loan application.
Can Lenders See Tax Debt?
Yes, mortgage lenders can see if you owe taxes to the Internal Revenue Service (IRS). During the underwriting process, lenders thoroughly review your financial history, including your credit report and tax returns. By examining these documents, lenders can identify any outstanding tax debts or liens that may affect your loan eligibility.
Impact of Tax Debt on Mortgage Approval
The presence of tax debt can complicate the mortgage approval process. Lenders view unpaid taxes as a potential risk factor, as they indicate a history of financial mismanagement or inability to meet financial obligations. Depending on the severity of the tax debt and your overall financial profile, lenders may:
-
Deny your loan application: In cases where the tax debt is substantial or you have a history of non-payment, lenders may decline your loan application due to concerns about your ability to repay the mortgage.
-
Require a larger down payment: To mitigate the risk associated with tax debt, lenders may ask for a larger down payment, typically ranging from 10% to 20% of the home’s purchase price.
-
Increase your interest rate: Lenders may charge a higher interest rate on your mortgage to compensate for the perceived risk of lending to someone with tax debt.
Tax Liens and Mortgage Eligibility
If your tax debt remains unpaid for an extended period, the IRS may file a tax lien against your property. A tax lien is a legal claim that gives the government priority over other creditors in collecting the outstanding tax debt. The presence of a tax lien can significantly hinder your ability to obtain a mortgage:
-
Conventional Loans: For conventional loans, tax liens may render you ineligible for a mortgage if the lien is filed in the county where you intend to purchase a home. Lenders typically require a clear title to the property, and a tax lien can cloud the title, making it difficult to secure financing.
-
FHA Loans: While FHA loans are more flexible than conventional loans, tax liens can still pose challenges. To qualify for an FHA loan with a tax lien, you must demonstrate that you have a valid repayment plan with the IRS and have made consistent payments for at least three months. Additionally, you may need to obtain a subordination agreement from the IRS, which gives the FHA priority over the tax lien.
-
VA Loans: VA loans are generally more lenient regarding tax debt. As long as you are enrolled in a repayment plan with the IRS and have made timely payments for the past 12 months, you may still be eligible for a VA loan.
Tips for Navigating Tax Debt and Mortgage Approval
If you have outstanding tax debt and are considering applying for a mortgage, consider the following tips:
-
Pay off your tax debt: The most effective way to address tax debt is to pay it off in full. This eliminates the risk associated with the debt and improves your chances of loan approval.
-
Establish a payment plan: If you cannot pay off your tax debt immediately, contact the IRS to establish a payment plan. Making regular payments demonstrates your commitment to resolving the debt and can improve your loan application.
-
Be transparent with your lender: When applying for a mortgage, disclose your tax debt to your lender upfront. Providing documentation of your payment plan or repayment agreement can help lenders assess your financial situation and determine your eligibility.
While tax debt can present challenges in the mortgage approval process, it is not an insurmountable obstacle. By understanding how lenders view tax debt, taking steps to address it, and being transparent with your lender, you can increase your chances of securing a mortgage and achieving your homeownership goals.
Can I Owe The IRS and Still Get a Mortgage?
FAQ
Can a lender find out if you owe the IRS?
Do underwriters contact IRS?
Do mortgage lenders check with the IRS?
Can owing back taxes prevent you from getting a mortgage?
What happens if you owe the IRS but need a mortgage?
Letters from the IRS start rolling in, and suddenly your goal of homeownership is in jeopardy. If you owe the IRS but need a mortgage, your first step is identifying the exact issue. Your federal tax debt will likely be classified first as delinquent tax debt, and then, if it remains unpaid, it will become a tax lien.
How do I get a mortgage if I owe the IRS?
Instructions for your Borrower: If the IRS has filed a Tax Lien against you in the county where the subject property is located – you WILL need to pay off the entire Federal Tax Debt and have the lien released prior to applying for a mortgage. If there is no federal tax lien filed and you just owe the IRS lots of money, we can make this work:
How do I know if I owe a tax lien?
Whether you underpaid your taxes or failed to file, the IRS will notify you that you owe, tell you how much you owe, and explain your options for repayment. If your tax debt has already been registered as a tax lien, it means the debt has gone unpaid, and the IRS has recorded a Notice of Federal Tax Lien in the county where you live.
What if I owe the IRS a lot of money?
If there is no federal tax lien filed and you just owe the IRS lots of money, we can make this work: Call the IRS and set up a repayment plan with them. Make sure that you ask them to send you a copy of the repayment agreement that specifies the total amount you owe and what the monthly payment amount will be.