IMPLICATIONS OF OWING BACK TAXES TO THE IRS

Owing back taxes to the IRS can complicate your chance of getting a dream home. Although you may still be approved for a mortgage with unpaid federal tax debt, you immediately become a riskier borrower because of it. In order for a home lender to approve it, you will need to take certain steps to show that you are current on your tax debt and that you are not in serious risk of defaulting on your mortgage loan payments.

Home loans and tax debt

The worst action you can take with your unpaid tax debt is to disregard it. If there is no agreement or payment plan with the IRS, the mortgage lenders will not approve your loan application. It is vital that your federal tax debt is treated along with any other debt, with your lender in advance.

Also, if you know you’re going to be applying for a mortgage with a hurdle like unpaid tax debt on the way, take the time to make sure everything else in your financial history is completely clean. Keep your expenses low, pay your credit cards, and continue to practice an answerable financial behavior.

Be sure to check your credit report often to discover any inaccurate information and discrepancies. For example, if you have recently started a tax payment plan, verify that your most recent credit report reflects these new changes. You will also want to ensure that outdated information, such as past due accounts, have been successfully removed from your report. Over time, you may see a higher credit score and a better credit history through careful monitoring and consistent payment behavior.

Do I have to pay my back taxes before buying a home?

Many mortgage lenders can work around serious credit problems like judgments, payment cancellations, collections, and bankruptcies. But a tax debt is slightly different. The IRS has broad authority to collect what is owed, so when it is owed to the IRS, a tax lien or garnishment can be issued to satisfy the debt. The problem for mortgage lenders is that the IRS can issue a lien against your property. In turn, the lender will be exempted from any possibility of recovering their losses, since it will be the second in the line to collect after the IRS.

While it’s true that you most likely won’t be approved for a home loan if you haven’t taken any steps to resolve your tax debt, showing confirmation that you’re working to resolve it can provide you with a practical solution. It is significant to be frank and honest with mortgage lenders about your unpaid taxes, as failure to disclose this type of information can result in immediate rejection of your application.

Can I buy a house if I have to pay other taxes?

If you owe other types of taxes such as property tax or state tax, you could still be approved for a mortgage. In general, the likelihood of getting a mortgage loan varies depending 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 build the best opportunity for approval, you must have an interest to settle or pay these debts before applying for a mortgage loan. This aids in reducing the ratio of your debts to your income and can even help you increase your credit score (if given enough time).

If you can’t eliminate your other tax debts before you apply for a mortgage, consider contacting your state or local debt agencies to agree on an installment payment plan for your tax obligations.

Can I get a FHA or VA loan with back taxes?

You can be approved for an FHA loan or a back-tax VA loan, but you will have to meet definite conditions first.

FHA Loan Approval

While it is possible to get an FHA loan if you owe taxes, you will be requested to go through the manual subscription process. The manual subscription process is different from the traditional subscription process. Typically, a computer algorithm decides whether or not you will be approved for a loan based on different variables such as your income, debt-to-income ratio, your account situation, and your credit rating. It is an automatic process that gives you a fairly quick decision.

Manual subscription, on the other hand, involves an individual or group who examines their finances in person. This type of subscription requires applicants to provide a significantly greater amount of paperwork and documentation. A subscriber will look for proof of a valid installment payment plan or agreement to pay the IRS. To be approved for an FHA loan with a tax debt, you are required to have made three months of payments under this current agreement.

In other words, FHA loan approval is not only tied to the status of your tax debts, but you will also need to meet other essential loan requirements, such as a good credit history and certain income thresholds.

VA loan approval

If you are applying for a VA home loan, you can still be approved with back taxes if you:

·        Meet the debt-to-income requirements, even with the included IRS monthly payment schedule.

·        Have made at least 12 consecutive payments on the IRS installment payment plan

·        Make a note of the back taxes pending on the loan application.

Note: There is no assurance that you will be approved for a home loan if you meet these conditions. But meeting these goals will help tip the odds in your favor as long as the rest of your finances are strong.

Do unpaid taxes affect mortgage payments?

Your unpaid taxes, in whatever form they take, can have an effect on your mortgage payments. When lenders assess your creditworthiness, they consider your risk as a borrower overall. If you have a huge amount of unpaid taxes, you are likely to face a higher interest rate.

These higher interest fees act to mitigate the risk of a borrower who has a higher risk of default based on their financial history.

Each lender has different models and methods to assess the danger that a particular applicant for a mortgage loan poses. A loan company may consider your financial situation as medium risk, with a fairly low default risk. But another company may find fault with its high debt / income ratio despite its high credit score. Or, perhaps another lender emphasizes a large down payment above other factors.

So it is important to search and compare when looking for mortgage lenders; you may be able to find a lender that offers more favorable terms despite your unpaid taxes. A lender who can offer you a lower interest rate, for instance, means you will have lower monthly mortgage payments and pay less for the interval of your home loan.

How to settle your tax debt

When a tax debt is owed, paying it at once may not be possible. Also, it can have a negative impact on your chances of being granted for a mortgage if you have to divert cash from the planned down payment to pay all your back taxes.
If the amount is too large to pay immediately, it is better for you to pay it in installments or to agree with the IRS for a lesser amount. If you are concerned that your tax debt will negatively impact your ability to insure your dream home, it is a good idea to find professionals who can handle the IRS on your behalf. A professional tax expert can aid you establish an IRS tax payment plan or make an Offer in Compromise to pay off your debt for a more manageable amount.