When you are under the cloud of the IRS, it can be difficult to move forward financially. They have many different ways to collect any back taxes you may owe. Often I’m asked if you can get a mortgage with a tax lien, and the answer is yes, but it is difficult.
the IRS doesn’t prohibit you from being a property owner.
What is a Federal tax lien?
Every US Citizen and many resident aliens are required to file and pay federal income taxes with the IRS if they have made a certain amount of money in the fiscal year.
If you don’t pay, the IRS can (and will) first try to notify you several times. Eventually, you will get a notice of federal tax lien on your personal property (property tax liens) or any other financial assets you may have (think bank accounts and wages from your job).
If it gets so far as this, there will also be penalties, interest, and additional costs plus the original amount.
Can you buy a house if the IRS has a lien against you?
Yes, you can buy a house if the IRS has a lien against you. These are actually becoming more and more frequent because the tax code is so complicated, and folks are working in more diverse ways than ever.
Maybe you are self-employed and didn’t do your quarterly income reports. Perhaps you sell on-line and get paid through Paypal. Maybe you are an Uber Driver or Door-Dasher.
I’ve learned that the federal government always finds out.
And if you don’t report your earnings, or make a mistake on your returns, the IRS will come after you. If you don’t pay, they put a lein on your home or garnish your wages.
But it is possible to buy a house if you are in this situation.
The first step: it is important to be open and honest with your mortgage lender. There’s no shame. We all have been forgetful or made mistakes (I know I have). The important thing is to be in a repayment plan.
What does it mean to be in a repayment plan?
Essentially, a lender doesn’t care that you have IRS debt. What they do care about is that you are paying it back.
Will an Underwriter see if I owe the IRS?
Yes, an Underwriter will see if you have any Tax debt to the IRS. Beginning in 2017 the rules changed so that Tax debts no longer appear on your credit report. But the mortgage companies will see any outstanding IRS liens you have. Mortgage lenders always check to see if you owe taxes.
On your mortgage application – whether you fill it out on paper, or online there is a section (sec 8 I believe) that asks Are there any outstanding judgments against you.
Remember it is fraud to lie on your mortgage application.
Does IRS tax lien take precedence over a mortgage?
Not Exactly. Lenders are concerned about your ability to pay the home loan mortgage on time for the duration of the note. If there is a large outstanding balance to the IRS, they know that the IRS won’t stop coming after you until you either pay it back, or have a payment plan in place, and are following the established monthly payments you agree to with the IRS.
Now, on the other side – let’s say you are the seller and the IRS has filed a lien against your house. You can still sell , but you won’t see any profits from the house until these things are taken care of:
- Your original mortgage will get paid off
- The IRS will get any debt owed
- Any outstanding property taxes will get paid
- Any other liens you have against you will get paid
Then, after all of those debts have been taken care of you get the rest.
How do Lenders Know if You Owe Taxes?
While it isn’t public record if you have an IRS lien, a lender will check to see if you have any judgment liens against you.
If you aren’t approved for a mortgage AND you have an IRS lien, the reason is probably something different. perhaps your income ratio isn’t high enough, it could be that you don’t have enough savings in your bank account. Maybe your credit score isn’t high enough.
As long as you have a payment plan with the Internal Revenue Service and are making those payments you are OK to get a mortgage loan. You might have higher interest rates, but the loan officer will work with you to make sure your monthly mortgage payments are something you can handle.
How to Qualify for a Mortgage with an IRS Repayment Plans
As I’ve mentioned it is important that your lender know – and that you tell them – about the lien. Once that is out in the open you can work together to get qualified.
- For conventional loans, you’ll need to show proof of at least one payment toward your tax debt before you close on your new home.
- For an FHA loan, you’ll need to show that you’ve made at least 3 on-time payments over a 3-month period in order to establish enough repayment history.
I’ve been told that the IRS payment amount is calculated into your overall debt burden. This includes things like car payments, credit card payments, student loans, and others. As long as your debt to income or DTI is favorable you can get a mortgage for real estate.
Can you get a second property if your first one has outstanding liens?
On this, it will be a case-by-case basis. I do know that your first property can not be sold or refinanced until the taxes are paid and the lien is discharged. But I don’t believe a lender will examine the first property.
Instead, they may look to see if you have enough equity, or that your entire debt load doesn’t prohibit you from making payments on the. new loan.
So, can you get a mortgage with a tax lien, Yes. But I don’t suggest you hide any delinquent taxes. Your lender will find any unpaid taxes and judgment lien against you. Have an IRS payment plan in place and be sure to make the minimum monthly payment amount.
The good news is if you do follow your IRS repayment agreement, you should be able to get a mortgage.