Ask The Underwriter: Can I Get a Mortgage if I Owe The IRS Money for Back Taxes?
If I owe the IRS money for delinquent taxes, can I still qualify for a mortgage?
Yes! You CAN qualify for a mortgage without paying off the entirety of your tax debt.
However, there are different requirements depending on the type of mortgage you are applying for – FHA or Conventional. I’ll break down what you need to do to qualify for each loan type below and include a set of easy to follow instructions.
If you're applying for a Conventional Loan - Fannie Mae or Freddie Mac:
The Fannie Mae Guideline states: “When a borrower has entered into an installment agreement with the IRS to repay delinquent federal income taxes, the lender may include the monthly payment amount as part of the borrower’s monthly debt obligations (in lieu of requiring payment in full).”
For this type of loan, it is important that there is no indication that a Notice of Federal Tax Lien has been filed against you in the county in which the subject property is located.
If the IRS has not filed a tax lien, follow these steps:
Call the IRS and set up an installment arrangement.
Obtain a copy of the installment agreement that specifies the monthly payment amount and total amount due.
Apply for a mortgage with your lender. It is important to disclose your monthly repayment plan and payment amount in your liabilities on the loan application. Make sure to provide your lender with the following documents:
An approved IRS installment agreement with the terms of repayment, including the monthly payment amount and total amount due.
Evidence you’re current on the payments associated with the tax installment plan. *Tip: You only need to make one payment prior to closing your mortgage loan so make sure your closing date is set after your first payment is due.
As long as the total of your monthly obligations, plus your monthly IRS payment, does not exceed 45% of your gross monthly income, you’re eligible for loan approval.
If the IRS has filed a tax lien: You WILL need to pay off the entire Federal Tax Debt and have the lien released prior to applying for a mortgage.
With the debt paid outright, you’ve taken care of this potential hurdle to your status as a homebuyer. You’re free to move forward with the mortgage process and receive your loan.
If you're applying for an FHA loan:
What the Guideline says: “Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the lien holder to make regular payments on the debt and the Borrower has made timely payments for at least three months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments. The lien holder must subordinate the tax lien to the FHA-insured Mortgage.”
To apply for an FHA loan with Federal tax debt, including a Federal tax lien, follow these steps:
Call the IRS and set up a repayment plan. Make sure you ask them to send you a copy of the repayment agreement specifying the total amount owed and the monthly payment amount. Keep the letter in a safe place to give to your lender when you apply for the mortgage.
You must make three consecutive on time payments, as agreed to in your repayment plan, before you APPLY for an FHA loan.
When you're ready to apply for the loan, make sure to inform your lender about the repayment agreement and to include the monthly payment amount in your liabilities on your application. You will need to provide your lender with the following documents:
A copy of the repayment agreement you received from the IRS.
Proof of the payments you’ve made. You can obtain this payment history from the IRS online or give them a call.
A subordination Agreement is only necessary if your federal tax debt has resulted in a federal tax lien being filed. You will need to work with your lender and the IRS to obtain a Subordination Agreement. This agreement simply means that the lien filed by the IRS will be secondary to the FHA’s lien. So should you sell the house or be foreclosed on – the IRS will get paid on their lien only after the lien placed by FHA is paid.
How can UpEquity help?
Every borrower has a unique financial situation and our team of mortgage experts is here for every step of your homebuying journey. If you have a plan in place to resolve your IRS tax debt and are ready to apply for our Buy with Cash or Buy Before You Sell programs, complete our online application. However, if you still have questions and would like to speak with one of our team members, you can get in touch with us here.