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Back to Back Taxes
If you’re looking for your dream home, it can get complicated if you owe back taxes to the IRS. While it’s still possible to get approved for a mortgage with a federal tax debt hanging over you, you immediately become a riskier borrower because of it. In order to be approved by a home lender, you’ll need to take certain steps to prove that you’re in good standing with your tax debt and show that you’re not in serious danger of defaulting on your home loan payments.
If you owe back taxes but you’re in the market for a new home, keep reading to learn how to navigate this issue so you can increase your odds for home loan approval while paying down your tax debt. Click on a topic below to skip directly to the section that answers your query or continue on for a full explanation.
- Do I Need to Pay My Back Taxes Before Buying a Home?
- Can I Buy a Home if I Owe Other Taxes?
- Home Loans & Tax Debt
- Can I Get an FHA Loan or a VA Loan with Tax Debt?
- Do Unpaid Taxes Affect My Mortgage Payments?
- How to Resolve Your Tax Debt
Do I Need to Pay My Back Taxes Before Buying a Home?
Many mortgage lenders can work around serious credit issues like judgements, charge offs, collections, and bankruptcies. But a tax debt is slightly different. The IRS has broad authority to collect what’s owed, so when you owe Uncle Sam, a tax lien or tax levy can be issued to satisfy your debt. The issue for mortgage lenders is that the IRS can issue a lien or levy against your property. In turn, the lender will be cut out of any possibility of recouping their losses, since they will be second in line to collect after the IRS. While it’s true that you likely won’t be approved for a home loan if you’ve taken zero steps toward resolving your tax debt, showing evidence of working toward tax resolution can provide you with a practical workaround. It’s important to be upfront and honest with mortgage lenders about your unpaid taxes because failing to disclose this type of information can result in immediate denial of your application.Can I Buy a Home If I Owe Other Taxes?
Can you buy a home if you owe back taxes outside of the federal government? If you owe other kinds of taxes like property tax or state tax, you might still be able to get approved for a mortgage. In general, your likelihood of being approved for a home loan varies based on your individual circumstances, but any type of debt added to your borrower profile can make you a riskier applicant in the eyes of a lender. To create the best chance for approval, it’s in your best interest to settle or pay these debts before applying for a home loan. This helps to lower your overall debt-to-income ratio and can even help you raise your credit score (given enough time). If you can’t eliminate your other tax debts before applying for a mortgage, consider reaching out to the state or local agencies to whom you owe debts to arrange an installment plan for your tax liabilities.
Home Loans & Tax Debt
The worst action you can take with your unpaid tax debt is to ignore it. If there’s no settlement or payment plan in place with the IRS, mortgage lenders are unlikely to approve your loan application. It’s critical to address your federal tax debt – along with any other debts – with your lender beforehand. And, if you know you’re going to apply for a mortgage with an obstacle like unpaid tax debt in your way, take the time to ensure everything else about your financial history is squeaky clean. Keep your spending low, pay off your credit cards, and continue to practice responsible financial behavior. Make sure to check your credit report often to identify any inaccurate information and discrepancies. For example, if you’ve recently started on a tax repayment plan, double check on your most recent credit report reflects these new changes. You’ll also want to ensure that outdated information, like delinquent past accounts have been properly expunged from your report. Over time, you may see a higher credit score and better credit history through careful monitoring and consistent payment behavior.Can I Get an FHA or VA Loan With Back Taxes?
You can get approved for an FHA loan or a VA loan with back taxes, but you’ll need to meet certain conditions first.FHA Loan Approval
While it is possible to obtain an FHA loan if you owe taxes, you’ll be required to go through the manual underwriting process. A manual underwriting process is different from the traditional underwriting process. Usually, a computer algorithm decides whether or not you’ll be approved for a loan based on different variables like your income, debt-to-income ratio, account standing, and credit scores. It’s an automatic process that gives you a fairly quick decision. Manual underwriting, on the other hand, involves an individual or group who scrutinizes your finances in person. This type of underwriting requires applicants to provide significantly more paperwork and documentation. An underwriter will look for evidence of a valid installment plan or agreement to repay the IRS. To be approved for an FHA loan with a tax debt, you’re required to have made three months of payments with this agreement in place. With that said, FHA loan approval isn’t just tied to the status of your tax debts, you’ll also need to meet other necessary requirements for the loan, like a good credit history and certain income thresholds.
VA Loan Approval
If you’re applying for a VA home loan, you can still be approved with back taxes if you:- Satisfy the debt-to-income requirements, even with the monthly IRS payment schedule included
- Have made at least 12 consecutive payments on the IRS installment agreement
- Make a note of your outstanding back taxes on the loan application
Do Unpaid Taxes Affect Mortgage Payments?
Your unpaid taxes, whatever form they take, may affect your mortgage payments. When lenders evaluate your creditworthiness, they look at your risk as a borrower overall. If you have a large amount of unpaid taxes, you’ll likely be faced with a steeper interest rate. These higher interest fees act to mitigate the risk of a borrower who presents a higher risk for defaulting based on their financial background. Every lender has different models and methods to assess the risk a given home loan applicant poses. One lending company may view your financial situation as a medium risk, with a fairly low risk of default. But another company could find fault in your high debt-to-income ratio despite your high credit score. Or, perhaps another lender emphasizes a large down payment over other factors. This is why it’s critical to shop and compare when you look for mortgage lenders; you might be able to find a lender who offers more favorable terms despite your unpaid taxes. A lender who can offer you a lower interest rate, for instance, means you’ll have lower monthly mortgage payments and pay less over the lifetime of your home loan.
