If You Owe the IRS, Can You Buy a House?

Are your dreams of owning a home dashed if you have tax problems? The answer can depend on your particular situation. The short answer is that owing the IRS money won’t automatically prevent you from qualifying for a home loan; a tax debt doesn’t equal a blanket rejection for a mortgage application. 

That doesn’t mean that you should ignore a tax debt! Things like missing tax returns and liens throw up some serious red flags for loan officers. While your lender’s terms and policies will ultimately determine your eligibility for a home loan, a negative tax situation will likely hinder you from owning a home. Take a look at what might be in store if you’re trying to get a mortgage without first getting everything squared away with the IRS.

Your First Obstacle to Being Approved for a Home Loan 

If you’re asking yourself, “Can I get a mortgage with unfiled taxes?” then you should keep reading. 

You might not get very far with the mortgage application process if you have unfiled tax returns in your recent history. Generally, lenders request W-2 forms going back at least two years when approving home loans. Lenders use your tax returns to verify your income as part of the application process. They need proof that you have consistently earned enough in recent years to fulfill your monthly mortgage payments for a particular home. Unfortunately, providing recent W-2 returns verifying your income becomes impossible to do if you haven’t filed your taxes. From the lender’s perspective, this is a big red flag.

Many lenders can’t provide you with a home loan if you cannot verify your annual income. That means you’re stuck until you prepare and file all unfiled tax returns. The good news is that this is generally very easy to do. There’s no need to be afraid of the IRS if you skipped a year of filing. They just want you to get current with your taxes. You may even finally get a tax refund to help build up your down payment for a house once you file. 

If you’ve been hesitating to file because you fear that you owe money to the IRS, filing is the first step to obtaining access to tax relief solutions that will help you clear your debt while avoiding interest and penalties. What’s more, being in a payment plan with the IRS to pay down a tax debt won’t automatically disqualify you from being approved for a mortgage.

Getting a Tax Lien Mortgage

If the IRS has placed a tax lien on your property due to unpaid taxes, getting a new mortgage becomes even more challenging. You’ll need to get that lien handled before being approved for a mortgage in nearly all cases. Owing taxes and having a lien are two very different circumstances from a mortgage loan officer’s perspective. In some cases, even if you have a tax lien, mortgage approval is possible if you’re currently on a repayment plan with the IRS. Mortgage lenders will need to see that you’ve been making consistent payments for a specific length of time before they’ll even consider working with you. What’s more, lenders may examine your application to ensure that you can manage potential mortgage payments at the same time as your lien payments. Lenders will often fold your monthly tax repayment into your debt-to-income ratio to make sure that you’re realistically capable of staying current with your mortgage to avoid foreclosure.

Be prepared to show lenders that you have a valid, current payment plan agreement with the IRS if you’re trying to obtain a mortgage while owing the IRS money. This may be your only path for getting a loan if you are not current with your tax payments. Most lenders will apply a special manual underwriting process for your loan if you’re making payments to the IRS.

The IRS Isn’t Your Only Concern

Can you buy a house if you owe taxes to the state? Liens are just one of the consequences of not paying your state taxes. Unfiled and unpaid state taxes can harm your chances of obtaining a mortgage just as much as IRS debt.

Can You Buy a House If You Owe Taxes?

It’s important to look beyond just eking by with the bare minimum when applying for a home loan. If you’re wondering, Can I get a mortgage with unfiled taxes? Then you should know it’s very possible. But failing to address your underlying debt with the IRS or state taxing authorities doesn’t put you in the best spot for negotiating favorable loan terms. 

If you’re allowing tax problems to cloud your record instead of taking advantage of options for IRS debt relief, you’re setting yourself up for a high interest rate. The big worry with this is that you’ll potentially end up paying tens of thousands of dollars more in pure interest than you should over the life of your mortgage. A lower interest rate with better terms increases your buying power to put you in a much better financial position as a buyer.

What’s the Plan If You Are Trying to Buy a Home With IRS Debt?

If you’re gearing up to buy a home, the time to address unfiled or unpaid taxes is now. The necessary steps will depend on where you stand with your ability to pay what you owe. The type of loan you’ll be applying for will also impact how to approach the application process. However, this is the general blueprint to follow when trying to obtain a mortgage with tax problems:

• Work with a tax professional to enter into a repayment plan with the IRS. Make sure to get a copy of the repayment agreement that details what your monthly payment amount will total. You may need to provide this documentation to your lender.
• Next, focus on making payments on time. Most lenders require between three and 12 consecutive payments on your record before they approve you for a mortgage.
• When applying for mortgages, inform your lender about the agreement that is in place. The lender may ask for a copy of your tax repayment agreement with proof of payment attached.
• If you’re applying for a mortgage but have a tax lien, you may need to obtain something called a Subordination Agreement from the IRS. This document confirms that the IRS’s lien will be secondary to the lien placed on your home by the mortgage company in the event of a foreclosure.
  
  

The dream of homeownership is not out of your grasp if you owe the IRS taxes, but allowing tax debts or unfiled returns to linger does make qualifying for a mortgage harder. Addressing tax problems as soon as possible is going to get you on track to being approved for a home loan. Ultimately, you will be in much better shape to afford a home once you’re able to get IRS penalties and interest out of the picture. However, the IRS won’t give you the opportunity to settle or pay off debts if you don’t reach out to ask for assistance.

If you’re hoping to come back strong from a tax issue to get approved for a home, Tax Group Center is in your corner. In many cases, the first step is simply finding out how much you owe in taxes. Getting that figure in your hands will help you get a realistic idea of how far away you are from getting approved for a home. Once we help you see where you are with tax debt, we’ll work on your behalf to establish debt forgiveness or installment agreements. Contact Tax Group Center today for a consultation.