Jim Quist is the President and Founder of NewCastle Home Loans. Jim has worked in the mortgage industry for over 20 years. His goal is to help home buyers find the information they need to close on their home purchase with confidence.
If you owe tax debt to the IRS, you may be afraid your dream of homeownership is on the line. And our underwriters are here to to tell you how you can get approved for a mortgage if you owe federal taxes. In fact, this is one of the most common mortgage questions we hear.
"I am looking to buy a new home, but I owe the IRS approximately $16,000 for tax years 2018 and 2019. I have been told that I need to pay off my delinquent tax debt before I can apply for a mortgage. I have $20,000 in savings, but I was hoping to use that money as a down payment to purchase the house. Is there any way to pay part of my tax debt off and qualify or do I really need to pay it all off?"
You do NOT need to pay off the entire tax debt that you owe in order to qualify for a mortgage! Depending on the type of mortgage you are applying for - FHA or Fannie Mae Conforming - you will need to meet certain requirements. We’ll breakdown what you need to do to qualify for each loan type below.
What FHA guidelines say about qualifying for a mortgage when you owe federal tax debt:
“Federal Tax Debts:
Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed 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 Mortgagee must include the payment amount in the agreement in the calculation of the Borrower’s Debt-to-Income (DTI) ratio.
Federal Tax Liens:
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.”
What this means to you:
- Call the IRS and set up a repayment plan with them. Make sure you ask them to send you a copy of the repayment agreement that specifies the total amount you owe and what the monthly payment amount will be. Keep the letter in a safe place and give it to your lender when you apply for the mortgage.
- You MUST make THREE CONSECUTIVE payments ON TIME, as agreed to in your repayment plan BEFORE you apply for an FHA loan. So, if you make your first payment on January 1st, the second on February 1st and the third on March 1st… you can apply for the loan on March 1st.
- When you 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 loan application. You will need to give them a copy of the repayment agreement you received from the IRS along with proof of the payments you’ve made. You can obtain a payment history from the IRS online or call them and have them send it to you.
- *This step is ONLY applicable if your Federal Tax Debt has resulted in Federal Tax LIEN being filed.* You will need to contact the IRS and work with your lender to obtain a Subordination Agreement from the IRS. A subordination 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.
What the Conventional - Fannie Mae guidelines say:
“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) if:
- There is no indication that a Notice of Federal Tax Lien has been filed against the borrower in the county in which the subject property is located.
- The lender obtains the following documentation:
- An approved IRS installment agreement with the terms of repayment, including the monthly payment amount and total amount due; and
- Evidence the borrower is current on the payments associated with the tax installment plan. Acceptable evidence includes the most recent payment reminder from the IRS, reflecting the last payment amount and date and the next payment amount owed and due date. At least one payment must have been made prior to closing.”
What this means to you:
If the IRS has filed a Tax Lien against you in the county where the subject property is located - you WILL need to pay off the entire Federal Tax Debt and have the lien released prior to applying for a mortgage.
If there is no federal tax lien filed and you just owe the IRS lots of money, we can make this work:
- Call the IRS and set up a repayment plan with them. Make sure that you ask them to send you a copy of the repayment agreement that specifies the total amount you owe and what the monthly payment amount will be. Keep the letter in a safe place and give it to your lender when you apply for the mortgage.
- Apply for a mortgage the same day you set up the repayment agreement with the IRS. Fannie Mae only requires that ONE payment be made before closing! So, there is no need to wait for the first payment to be made under the agreement, as long as you will make that first payment before your loan closes.
- Again, remember to tell your lender about the repayment plan and to include the monthly payment amount in your liabilities on the loan application.
Have more questions about tax debt and buying a home?
Put your game face on, dial up the IRS, and get them to agree to a repayment plan with terms that make both your debt repayment and homeownership possible. If you have more questions, make sure to comment below or schedule a time to talk. We hear this question on a daily basis and are here to help.
If you're still in the early stages of buying a home, make sure to download our free First-time Home Buyer's Guide to walk you through the process! You'll learn insider advice and how your debt works into your mortgage approval.