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Can I Get a Mortgage with Unfiled Taxes?

The short, sharp answer is this: getting a mortgage with unfiled taxes is extraordinarily difficult, and in most cases, impossible. Lenders want to see a clear picture of your financial health, and unfiled tax returns throw a massive wrench into that process. They represent a significant red flag, suggesting potential issues with income stability, debt obligations, or even potential legal problems with the IRS. Let’s delve deeper into why this is the case and what steps you can take to remedy the situation.

The Mortgage Lender’s Perspective: Why Unfiled Taxes are a Deal-Breaker

Imagine you’re a lender, tasked with lending hundreds of thousands of dollars to someone. You need assurance that the borrower can reliably repay the loan. Tax returns are a crucial piece of that puzzle because they provide verified, comprehensive information about:

Income: Lenders need to know how much you earn to assess your ability to make mortgage payments. While pay stubs can provide some information, tax returns offer a year-end summary that includes all sources of income, even those not subject to regular payroll deductions.
Debt-to-Income Ratio (DTI): This crucial ratio compares your monthly debt payments to your gross monthly income. Unfiled taxes mean the lender can’t accurately calculate this ratio, making it impossible to assess affordability.
Tax Liabilities: Unfiled taxes can mask potential IRS debts. Lenders are extremely wary of lending to someone who owes back taxes, as the IRS can place a lien on the property, jeopardizing the lender’s collateral.
Financial Responsibility: Filing taxes is a fundamental civic duty. Unfiled returns suggest a lack of financial responsibility, which raises concerns about your ability to manage a mortgage.

Simply put, lending money to someone with unfiled taxes is considered high-risk. Lenders are in the business of managing risk, and minimizing it is their top priority.

The IRS Angle: Why You Can’t Ignore Unfiled Taxes

Ignoring unfiled taxes isn’t just a problem for mortgage applications; it’s a problem with the IRS. The IRS can:

File a Substitute for Return (SFR): The IRS will create a tax return on your behalf, often based on the information they have from employers and other payers. This SFR is almost always to your disadvantage, as it won’t include deductions or credits you’re entitled to.
Assess Penalties and Interest: Penalties for failure to file are substantial, often exceeding the tax owed. Interest accrues on the unpaid tax from the original due date.
Garnish Wages and Levy Bank Accounts: The IRS has the power to seize assets and income to satisfy outstanding tax liabilities.
File a Federal Tax Lien: This lien attaches to all your property, including your home, making it difficult to sell or refinance. This is especially bad when trying to get a mortgage!

What You Need to Do: Getting Back on Track

The good news is that you can rectify the situation. Here’s a step-by-step approach:

Gather Your Records: Collect all W-2s, 1099s, and other income-related documents for the years you haven’t filed.
File Your Delinquent Returns: The easiest way is to work with a qualified tax professional (CPA or Enrolled Agent). They can help you reconstruct your records, file accurate returns, and negotiate with the IRS if necessary.
Address Any Tax Liabilities: If you owe money, explore payment options with the IRS, such as an installment agreement or an Offer in Compromise (OIC).
Obtain IRS Verification: Once your returns are filed and any liabilities are addressed, obtain a transcript from the IRS to prove to the lender that you are in good standing.

Showing a Good Faith Effort

Even while you are catching up, demonstrating a good faith effort to resolve your tax issues can sometimes help your mortgage application, but it is still very difficult. Lenders may be more willing to work with you if you:

Have a Payment Plan in Place: A documented payment plan with the IRS shows that you are actively addressing your tax debt.
Provide Proof of Filed Extensions: If you filed for extensions in the past, it might demonstrate that you intended to file.
Explain the Reason for the Delay: A legitimate reason for the delay (e.g., illness, natural disaster) might soften the lender’s stance, although this is rare.

The Bottom Line: Resolve Your Tax Issues First

In almost all cases, filing your delinquent taxes and resolving any outstanding liabilities is a prerequisite for mortgage approval. It’s a crucial step in demonstrating financial responsibility and providing lenders with the information they need to assess your creditworthiness. Delaying this step will only prolong the process and potentially damage your credit further. So, prioritize getting your tax situation in order before pursuing a mortgage.

Frequently Asked Questions (FAQs)

Here are some frequently asked questions related to mortgages and unfiled taxes:

1. What if I’m Self-Employed and Have Unfiled Taxes?

Being self-employed with unfiled taxes is even more problematic. Lenders scrutinize self-employed borrowers more closely, requiring detailed documentation of income and expenses. Unfiled tax returns make it nearly impossible to verify self-employment income and calculate accurate DTI. You must file your Schedule C and all related forms to demonstrate income and legitimacy.

2. Can I Get a Mortgage if I’m on a Payment Plan with the IRS?

It’s possible, but not guaranteed. Some lenders are more lenient if you have a documented payment plan with the IRS and have made several payments on time. However, they will likely require a significant down payment and a higher interest rate to compensate for the increased risk.

3. Will Filing an Extension Help Me Get a Mortgage?

Filing an extension provides you with more time to file your taxes, but it doesn’t eliminate the requirement to file. While it might show good faith, lenders still need to see the completed tax return before approving a mortgage.

4. What Happens if I Owe a Significant Amount of Back Taxes?

Significant back taxes make it much harder to get a mortgage. The lender will be concerned about the IRS potentially placing a lien on the property. You’ll need to address the tax liability, ideally by paying it off or establishing a payment plan, before you can qualify for a mortgage.

5. How Many Years of Tax Returns Do I Need to Provide for a Mortgage?

Typically, lenders require the past two years of tax returns. Some lenders may ask for three years, especially if you’re self-employed or have complex income streams.

6. What if My Unfiled Taxes are Several Years Old?

The older the unfiled taxes, the more skeptical lenders will be. The IRS will likely have already filed SFRs, which could be significantly different from what you would have filed. You need to address all unfiled years to resolve the issue completely.

7. Can a Co-signer Help Me Get a Mortgage with Unfiled Taxes?

A co-signer with strong credit and a stable income can strengthen your application, but it won’t magically erase the problem of unfiled taxes. The lender will still need to verify your ability to repay the loan, and unfiled taxes hinder that process.

8. Are There Any Lenders Who Don’t Require Tax Returns?

Some lenders specialize in non-qualified mortgages (non-QM), which have more flexible underwriting requirements. However, these mortgages typically come with higher interest rates and fees to compensate for the increased risk. Even non-QM lenders will likely require some form of income verification, which can be difficult without tax returns.

9. How Does a Tax Lien Affect My Mortgage Application?

A tax lien is a major red flag for lenders. It means the IRS has a legal claim on your property, and the lender’s security interest is secondary. It’s extremely difficult to get a mortgage with an active tax lien. You’ll need to satisfy the lien before applying.

10. Can I Use Bank Statements Instead of Tax Returns?

Bank statements can provide some information about your income, but they are not a substitute for tax returns. Lenders need the verified, comprehensive information contained in tax returns to assess your financial health accurately.

11. How Long Does it Take to Get My Tax Returns Filed and Resolved?

The time it takes to file and resolve your tax issues depends on the complexity of your situation. If you have simple tax returns and readily available records, it could take a few weeks. More complex cases, especially those involving significant tax liabilities or IRS audits, can take months. Start the process as soon as possible.

12. Where Can I Get Help Filing My Unfiled Taxes?

Certified Public Accountant (CPA): CPAs are licensed professionals who can provide tax preparation, planning, and representation services.
Enrolled Agent (EA): Enrolled Agents are federally licensed tax practitioners who can represent taxpayers before the IRS.
IRS Volunteer Income Tax Assistance (VITA): VITA offers free tax help to people who generally make $60,000 or less, persons with disabilities, and limited English-speaking taxpayers.
Tax Counseling for the Elderly (TCE): TCE offers free tax help to taxpayers age 60 and older.

In conclusion, while it might feel daunting, addressing your unfiled tax returns is a crucial step towards homeownership. By tackling the issue head-on and working with qualified professionals, you can significantly improve your chances of getting approved for a mortgage and achieving your dream of owning a home.