Can You Get a Mortgage If You Owe the IRS? The Unvarnished Truth

The short, sharp answer is: yes, it’s possible, but it’s complicated. Owing the IRS doesn’t automatically slam the door shut on your mortgage dreams, but it certainly throws up some significant hurdles. Think of it as navigating an obstacle course – you can get through, but you’ll need a strategy, the right gear, and a healthy dose of perseverance. Let’s dive deep into what that obstacle course looks like and how to conquer it.

The IRS Debt and Mortgage Approval Dance: A Delicate Tango

The reality is that lenders are cautious. They’re in the business of assessing risk, and outstanding IRS debt signals potential financial instability. Remember, a mortgage is a long-term commitment, and lenders want to be confident you can consistently make your payments. IRS debt can be seen as a competing claim on your income, making them nervous.

However, it’s not a complete roadblock. The key lies in understanding how the IRS debt impacts your creditworthiness and what steps you can take to mitigate the risk in the eyes of the lender. Let’s break down the key factors:

• Credit Score: This is paramount. The lower your credit score, the harder it will be to get approved, regardless of the IRS debt. Focus on improving your credit score before seriously pursuing a mortgage.
• Debt-to-Income Ratio (DTI): Lenders scrutinize your DTI like hawks. This ratio compares your monthly debt payments (including the potential mortgage) to your gross monthly income. IRS debt adds to your monthly obligations, potentially pushing your DTI into unacceptable territory.
• Tax Liens: This is where things get particularly tricky. A federal tax lien is a legal claim the IRS places on your property when you fail to pay your taxes. It’s a red flag for lenders because the IRS has priority over other creditors, including mortgage lenders, in the event of foreclosure.

The Impact of Tax Liens on Mortgage Approval

A tax lien signals to lenders that the IRS has a legal claim on your assets. Until recently, having an outstanding tax lien almost guaranteed mortgage denial. However, guidelines have evolved, particularly with government-backed loans like FHA and VA.

• FHA Loans: The Federal Housing Administration (FHA) used to have a strict “no tax lien” policy. However, that has softened. Now, you can get an FHA loan with an outstanding tax lien, if you are on an IRS-approved payment plan and have made timely payments for a specified period (usually 3-6 months). The payment plan must be acceptable to the lender. They’ll want to see the terms and that it fits within your DTI ratio.
• VA Loans: The Department of Veterans Affairs (VA) also allows for mortgages with outstanding tax liens under certain conditions. Similar to FHA, being on an IRS-approved payment plan is typically required. The VA also emphasizes the veteran’s overall creditworthiness and ability to repay the loan.
• Conventional Loans: These loans, not backed by the government, tend to be the most stringent. Lenders often require the tax lien to be paid off before approving a mortgage. However, some lenders might consider a payment plan, especially if you have a large down payment, excellent credit, and a low DTI.

Strategies for Overcoming the IRS Debt Mortgage Hurdle

Don’t despair! Even with IRS debt, you can increase your chances of securing a mortgage. Here’s your game plan:

• Tackle the Debt Head-On: The most obvious, and often the most effective, solution is to pay off the IRS debt. This removes the lien and improves your overall financial picture. Explore options like selling assets or consolidating debt.
• Negotiate an IRS Payment Plan: If you can’t pay the debt in full, establish an IRS-approved payment plan (installment agreement). As mentioned, this is often a requirement for FHA and VA loans. Ensure you make timely payments and keep meticulous records.
• Consider an Offer in Compromise (OIC): An OIC allows you to settle your tax debt for a lower amount than what you owe. This is a complex process with specific eligibility requirements, but if successful, it can significantly reduce your IRS burden.
• Improve Your Credit Score: Focus on boosting your credit score. Pay bills on time, reduce your credit card balances, and dispute any inaccuracies on your credit report.
• Increase Your Down Payment: A larger down payment reduces the lender’s risk, making them more likely to approve your loan, even with IRS debt.
• Lower Your DTI: Find ways to reduce your existing debt. Paying off smaller debts can make a big difference.
• Shop Around for Lenders: Not all lenders are created equal. Some are more willing to work with borrowers who have IRS debt. Work with a mortgage broker who can connect you with lenders specializing in these situations. Be transparent about your IRS debt from the outset.
• Document Everything: Keep detailed records of all communication with the IRS, your payment plan agreement, and any payments you’ve made. This documentation will be crucial when applying for a mortgage.
• Seek Professional Advice: Consult with a tax professional and a mortgage broker. They can provide personalized guidance based on your specific financial situation.

Frequently Asked Questions (FAQs)

Here are some frequently asked questions to further illuminate the landscape:

1. Will the IRS automatically tell my mortgage lender about my tax debt?

No, the IRS doesn’t proactively inform lenders about your tax debt. However, a tax lien is a matter of public record and will show up on a title search, which lenders conduct during the mortgage approval process. Furthermore, lenders will review your credit report, and unpaid tax obligations can negatively impact your credit score.

2. What’s the difference between a tax lien and a tax levy?

A tax lien is a legal claim against your property. A tax levy is the IRS’s action of seizing your property (like wages, bank accounts, or assets) to satisfy the tax debt. A levy is a more aggressive action that typically follows the establishment of a tax lien. Having a tax levy is a significant red flag for lenders.

3. How long does a tax lien stay on my credit report?

A federal tax lien remains on your credit report for seven years from the date it was filed, or until it’s paid off, whichever is longer.

4. Can I get a mortgage if I’m on an IRS Offer in Compromise (OIC) payment plan?

It depends on the lender and the specific terms of your OIC. Some lenders may be hesitant, while others may consider it, especially if you have a strong credit history and a substantial down payment. However, it’s generally more challenging than being on a standard installment agreement.

5. What if my IRS debt is under appeal?

Having your tax debt under appeal can complicate the mortgage process. Lenders may want the appeal resolved before approving a loan. However, some lenders might consider your application if you can demonstrate a reasonable likelihood of a favorable outcome in the appeal process. Provide documentation of the appeal and its potential impact on your tax liability.

6. Does the type of IRS debt matter (e.g., income tax vs. payroll tax)?

Yes, it can. Lenders often view unpaid payroll taxes (trust fund recovery penalty) more negatively than unpaid income taxes, as they are considered a breach of trust.

7. I’m self-employed. Does that make it harder to get a mortgage with IRS debt?

Potentially, yes. Lenders scrutinize self-employed borrowers more closely due to the potential for fluctuating income. Having IRS debt further complicates matters, as it raises concerns about your ability to manage your finances.

8. Will a co-signer help me get a mortgage if I owe the IRS?

A co-signer with good credit and stable income can strengthen your mortgage application, but it doesn’t guarantee approval. The lender will still assess your individual creditworthiness and the impact of the IRS debt.

9. What kind of documentation will I need to provide to the lender regarding my IRS debt?

Expect to provide the following: copies of IRS notices, the installment agreement (if applicable), payment history, proof of appeal (if applicable), and any other documentation related to your tax situation.

10. Can I refinance my mortgage if I owe the IRS?

Refinancing is similar to applying for a new mortgage. The same considerations regarding your credit score, DTI, and tax liens apply. It may be more challenging to refinance with outstanding IRS debt, but it’s not impossible.

11. If my spouse owes the IRS but I don’t, will that affect my ability to get a mortgage?

Potentially, yes. In community property states, the debts of one spouse can affect the other. Even in non-community property states, the lender will consider the overall household financial situation.

12. How can I find a lender who specializes in working with borrowers who have IRS debt?

Work with a mortgage broker. They have access to a wide network of lenders and can identify those who are more willing to work with borrowers who have unique financial circumstances, including IRS debt. Look for brokers with experience in dealing with these specific scenarios.

Ultimately, navigating the mortgage process with IRS debt requires transparency, persistence, and a proactive approach. By addressing the debt, improving your financial profile, and working with the right professionals, you can significantly increase your chances of achieving your homeownership goals. Good luck!