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Can You Buy a House If You Owe Taxes?
Key takeaways
Showing consistent payments for over three months on your IRS repayment plan and maintaining those timely payments is the only way to secure your ability to be approved to get a mortgage or a loan if you owe taxes to the IRS.
Take the time to lower your debt-to-income ratio.
A tax lien on a property might impede the selling process.
Even if your credit isn’t ideal, you are enabled to qualify for a low-interest mortgage when purchasing or refinancing.
So, if you’re a qualified army veteran, you can opt for getting a mortgage approval, even when it looks like a home loan is not feasible.
Talk to your lender about the proof they’ll want that the loan has been repaid, and then present them with the appropriate documents, including the repayment amount and payment receipt.
Remember that it takes time for the IRS to review and formalize your repayment agreement.
To qualify for an FHA home loan, you must demonstrate that you have made at least three on-time payments within the past three months.
If you owe taxes, a repayment agreement is usually the easiest option.
If you owe back taxes, even as a business owner, it is best to be forthright with your lender before you apply can save everyone time and allow you to explore alternatives for obtaining a mortgage in good faith, even if you have existing tax debt.
In most cases, you cannot buy a house if you owe tax debt.
If you are okay with paying penalties and interest on your tax debt, you might consider offering a significant down payment on your conventional mortgage since it might help you get mortgage approval.
Looking to buy a house, but do you have taxes you owe to the IRS? Perhaps you haven’t even started looking for a home because you think you’ll never be approved due to tax debt?
Whatever the case, our tax experts here at Ideal Tax Solution want to let you know that you’re not alone and that there are things you can do today to get into the home of your dreams! Today, we wanted to give you some tips and steps to be on the path to buying a home.
Resolving your tax debt
Sometimes this is easier said than done, as the money owed on your back taxes might be out of reach to just cut a check and be done. This wouldn’t stop you from being able to buy your home now; it just makes things a little more complicated.
The FHA has guidelines for instances like this when people are trying to buy their homes and have tax debt. For example, private lenders for FHA loans will always do a background check for outstanding tax debt, or unfiled taxes.
What should I do when I have tax debts but want to qualify for conventional loans?
The best thing to do is to set up a repayment plan with the IRS to resolve the matter directly with them. Showing consistent payments for over three months on your IRS repayment plan, and maintaining those timely payments is the only way to secure your ability to be approved to get a mortgage, or a loan if you owe taxes to the IRS. Having an installment agreement can decrease the amount paid in interest on your tax return.
So, calling the IRS and setting up your repayment plan is a big way to ensure you can buy your new home. Ideal Tax Solution can help with this and negotiate manageable repayment terms with the IRS on your behalf. That’s just what we do, and we do it well!
Reducing your debt to income ratio
When you owe a large amount of back taxes, you’re no doubt looking for some tax relief. And way to help find that is to start resolving your tax debt with the IRS by making payments. But there is something else you can start doing to improve your chances of getting approved for a mortgage loan.
You are taking the time to lower your debt-to-income ratio. The total amount of your monthly debt-related expenses is divided by your gross monthly income. Your debt to income ratio is better when you’re in little debt. The thing is, when you owe a large amount of tax debt to the IRS, your DTI remains to be high.
Finding ways to combine accounts onto one single card with better terms or proper budgeting are ways to lower that. Again, to help with this, ITS tax experts can work with you to renegotiate better repayment terms on your IRS tax debt and provide some relief.
Can You Obtain a Mortgage if You Have a Tax Lien?
The government can impose a tax lien against your property if you fail to pay your tax due. The lien is put on your property if you fail to pay your taxes on time after the IRS has assessed your tax burden and given you a notice and demand for payment.
A tax lien on a property might impede the selling process. According to the IRS, you must pay the claim before selling or refinancing your home if there is a federal tax lien on your house. The IRS offers solutions, after which the answer to: can you buy a house if you owe taxes is yes.
If you have equity in your house, you can pay off the lien at closing with the profits from the sale. Or, if your home’s selling price is less than the amount of the lien, you can obtain a release from the IRS so the sale can proceed.
Tax liens might make mortgage lenders hesitant to grant a home loan when purchasing a home. “Mortgage lenders consider tax debt a significant concern that takes precedence over other obligations,” adds Howard. Generally, paying back the IRS is a higher priority for the borrower than paying back the mortgage lender.
Getting a mortgage - An out-of-the-ordinary scenario
A VA loan is the premier reward of military service for qualified veterans, service members, and surviving spouses. Even if your credit isn’t ideal, it enables you to qualify for a low-interest mortgage when purchasing or refinancing. So if you’re a qualified army veteran, you can opt for getting a mortgage approval, even when it looks like a home loan is not feasible.
Can I Purchase a Home if I Owe Back Taxes to the IRS?
A tax lien might feel like an enormous weight if you’re about to move into a new property. You may be concerned that you may be unable to obtain a mortgage or financing, and a pending tax lien may deter prospective purchasers. Moreover, lenders’ guidelines outline that debt might result in mortgage debt, late mortgage payments, and a levy on your house if you owe significant property taxes, or delinquent tax debt.
You should know what a tax lien is, how to get rid of one, and what to do next if you find yourself in this unpleasant scenario. Continue reading to learn more.
Priorities come first
If you’re a potential homebuyer with a tax lien, you should ensure that you’ve made at least a year’s on-time payments. Pay it off in total if you can, but if that’s not feasible, realize that you may have less purchasing power and a more difficult path until the debt is cleared.
Meanwhile, you should also monitor your overall financial success by routinely reviewing your credit reports. Monitor your credit ratings for gains or decreases. Aking an active part in your credit might help you get on track to purchase a home, especially if you encounter you settling obstacles like a tax lien.
Settling your tax debt.
Before you plan to buy a house, the best and quickest time to pay off past-due tax obligations in full. Communicate with the internal revenue service directly to determine the payback amount for the total amount outstanding, and then pay the IRS directly to settle the exact payoff amount.
The most crucial step is to start with at least one payment, to reduce the size of your loan amount, and interest, respectively. It will significantly decrease the taxes you owe over time if you manage to make steady monthly payments.
Talk to your lender about the proof they’ll want that the loan has been repaid, and then present them with the appropriate documents, including the repayment amount and payment receipt. The lender will verify that the amount has been paid in full and that the IRS has waived any liens against you. With the loan paid in full, you have eliminated a possible barrier to becoming a homeowner. You may proceed with the mortgage application procedure and obtain your loan.
Enter into a payment plan with the IRS.
Depending on your financial circumstances and the amount you owe, you may be unable to pay the IRS in total to settle your obligation.
If you cannot clear the debt in full before closing, your best option is to establish a payment plan with the IRS, which is some kind of loan program set up by the IRS to help people owing taxes, helping them to make monthly payments towards their financial responsibility.
Discuss your payment plan specifics with the internal revenue service and establish a plan that will assist you in aggressively addressing the IRS debt. Remember that it takes some time for the IRS to review and formalize your repayment agreement.
Please don’t wait until the closing of your new house to establish the plan. In the event of IRS debt, taking responsibility and communicating openly with your lender is advisable because it helps you avoid penalties and additional interest charges
Once your repayment plan is in place, you must begin paying payments on schedule as agreed with the IRS. As you do so, you will receive documentation demonstrating that you are actively making payments and complying with the agreement.
To support evidence: you can supply your lender with a copy of the contract containing the monthly payment amount and the total amount owing, along with proof that you are current on the payments.
To approve your mortgage, many lenders will want this evidence showing you have begun paying down your tax liability. In addition, for a conventional loan, they will need insight into your tax issues and financial situation.
The conditions for established payments
When the FHA needs to assess your ability to get a mortgage approval, we call this the manual underwriting process.
- You must provide evidence of at least one tax debt payment for traditional loans before closing on your new house. To qualify for an FHA home loan, you must demonstrate that you have made at least three on-time payments within the past three months.
- You must provide evidence of at least one tax debt payment for traditional home loans before you get a mortgage on your new house.
- To qualify for a home loan/FHA loan from the federal housing administration, you must demonstrate that you have made at least three on-time payments within the past three months.
Remember that this installment agreement might affect your FHA loan calculations and ability to borrow. Because you have a formal monthly repayment arrangement with the IRS, your lender will include this regular payment amount in your monthly debt obligations.
An increase in IRS repayment amounts could increase the debt-to-income ratio (DTI) and reduce borrowing capacity. If you owe taxes, a repayment agreement is usually the easiest option.
Accept the repercussions of failing to pay the debt.
Suppose you opt to overlook your unpaid tax bill. In such a circumstance, the IRS will inform your county of residence and file a lien against your property. A federal tax lien is a public notification that the United States Treasury is entitled to the amount you owe.
Important to note is that the government’s legal claim encompasses any property you already hold or may acquire in the future.
As previously said, a tax obligation towards state taxes that becomes a tax lien makes it more challenging to obtain a mortgage. Mortgage lenders demand a position of the first lien on the property’s title. The funds are used to pay down the first lien at the time of sale. The second lien is paid if any funds remain after the first lien has been paid in full.
Tax liens are not recorded on credit reports, but that doesn’t mean your lender won’t find out that you have tax liens.
To elaborate, lenders review public records and credit information as part of the application process to confirm that a borrower is not late on federal tax debt and does not have a tax lien or owe taxes to the internal revenue service.
If you owe back taxes, even as a business owner, it is best to be forthright with your lender before you apply can save everyone time and allow you to explore alternatives for obtaining a mortgage in good faith, even if you have existing tax debt.
How Does a Federal Tax Lien Differ from a Tax Levy?
If you owe the IRS back taxes, you may have heard of liens and levies. Despite being usually grouped, they are distinct. A lien secures the Internal Revenue Service’s interest in your property, but it does not seize the asset. In contrast, a levy happens when the IRS takes and sells your property to recoup unpaid taxes.
In most cases, you cannot buy a house if you owe tax debt. In addition, having unpaid tax debt can make it significantly harder to qualify for a conventional mortgage.
Obtaining a mortgage despite federal tax debt
Suppose you owe a substantial amount of unpaid taxes and have not reached an arrangement with the IRS to pay, delay payment, or settle the taxes. In that case, the IRS will eventually seek collection procedures such as levying and putting a lien on your assets.
An IRS tax lien might hinder your ability to buy a house. When the IRS registers a tax lien, it notifies all other creditors that it has priority to collect a debt from you.
What if I have a lien on one of my assets?
Obtaining a mortgage will be challenging if you have an IRS lien on your income or assets. Tax liens do not appear on credit reports, but your lender will likely find them while searching for liens. Unpaid taxes might signal to lenders that the mortgage will also fall into arrears.
While a tax lien will not prevent you from obtaining an FHA loan, it might prevent you from getting conventional private mortgages or significantly increase your interest rate.
In addition, if you owe back taxes to your state, the state tax department may also place liens or lien equivalents on your property. Numerous states have short payment deadlines before filing a lien or lien equivalent. Thus state tax debt might impair your ability to borrow rapidly.
If you are okay with paying penalties and interest on your tax debt, you might consider offering a significant down payment on your conventional mortgage since it might help you get mortgage approval. It all depends on the interest rate on the FHA loan if you owe money on your tax return.
So, can you buy a house if you owe taxes?
An experienced tax attorney at Idealtax.com can help. Whether you’re looking to buy a home now or start getting ahead of your back taxes and IRS delinquent tax debt, call us today to find out how we can help you get into your new home sooner than you think!
Our qualified professional tax assistant can help you file your taxes to the IRS in a timely manner with the help of a payment plan with the internal revenue service until you don’t owe taxes anymore.
What can Idealtax.com offer me?
We provide professional guidance to people whose lives have been affected by tax returns. Please contact us for a free consultation to evaluate your specific tax issue and determine if you qualify for tax relief. Our Senior Tax Analysts will work with you over the phone, via e-mail, and by regular mail.
Disclaimer
The content of this post does not replace the advice of a licensed tax professional. Consult a qualified tax professional for questions specific to your circumstances.