Don’t assume you can’t get a mortgage if you owe back taxes, but be prepared to take some steps to correct the problem. You’ll need to adhere to an IRS payment plan and share the information with your lender, who can direct you to loan programs that allow borrowers with tax debt.
Here’s what you need to know to buy a house if you owe the IRS.
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How to Resolve Back Taxes for Mortgage Approval
Tax debt can interfere with getting a mortgage when the IRS records a Notice of Federal Tax Lien or a public statement that it has a claim on your property. If you have a tax lien, the proceeds from selling your home must first go to paying the IRS before you can pay off a mortgage.
“You put the world on notice that this person owes the IRS, and that’s the point that it becomes problematic in getting a loan,” says Whitney Sorrell, managing attorney of Sorrell Business & Tax Law.
Failing to pay the full amount you owe triggers a process that can lead the IRS to record a public tax lien. Here’s the timeline:
1. You file a tax return and don’t pay the entire amount due, or the IRS determines that you owe additional tax. The IRS sends you a CP14 notice that tells you how much you owe and when it’s due.
2. If you don’t pay your debt by the due date, interest starts to accrue. The IRS now automatically has what’s known as a “secret” lien on your property, or a legal claim that hasn’t been made public yet.
3. About 10 days later, the IRS sends a CP501 notice. This document reminds you that you owe tax and states that the government may file a Notice of Federal Tax Lien if you don’t pay it.
4. About five weeks later, the IRS sends another reminder notice, the CP503. If the IRS hasn’t already recorded a public lien, it may do so if you don’t respond to this communication.
5. After approximately another five weeks, the IRS sends the CP504, which tells you that it intends to seize your wages or property if you don’t pay your tax debt. If a federal tax lien has not yet been publicly recorded, it may be recorded now.
6. About five weeks later, the IRS sends Letter 1058. This tells you that the IRS plans to seize your property and may file a Notice of Federal Tax Lien if it hasn’t already. If you want to dispute the IRS’s assessment, you still have 30 days to ask for a Collection Due Process hearing.
7. After 30 days, the IRS can begin to levy your property and may record a tax lien if it hasn’t by this point.
How to Prevent a Tax Lien
As long as you don’t have a large unpaid balance, you can often prevent a public tax lien by setting up an IRS payment plan or installment agreement. There are two main types of arrangements that you can enter into online:
— A long-term payment plan. If you owe $50,000 or less in combined tax, penalties and interest, you can set up a plan to pay the debt in monthly payments for up to 72 months. You may be charged a fee to set up this plan.
— A short-term payment plan. If you owe less than $100,000 in total, you can set up a plan to give yourself 180 days to pay the balance in full.
According to Sorrell, the IRS generally won’t record a lien for debts under $10,000. But this decision is usually at the discretion of the revenue officer, and a lien may not be recorded.
For large unpaid tax obligations, setting up a payment plan may not be enough to prevent a lien. However, you may be able to prevent a tax lien by posting a bond. Alternatively, you can participate in a Collection Due Process hearing and try to persuade the IRS that recording a public lien would hinder your ability to generate income and pay the debt.
Finally, you can prevent a tax lien by entering into an offer in compromise with the IRS. With this option, you offer to pay less than the full amount you owe. The IRS may agree if you demonstrate that you are facing financial hardship or that it won’t be possible for you to pay in full. Although this option can work, it may not be the easiest option.
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Why IRS Liens Don’t Show on Credit Reports and Why That’s a Problem
Tax liens don’t appear on credit reports, and neither do IRS payment plans. But that doesn’t mean they won’t affect a mortgage application. In fact, it’s especially important to understand what you owe and disclose your tax debt to lenders upfront because they won’t learn about it from a simple credit check. A last-minute surprise could delay or derail a mortgage closing.
“The thing that makes the tax lien trickier than maybe some of the other pieces of debt that they might have is that it doesn’t show up on the credit report. So it would typically be a much later stage discovery,” says Neil Bader, executive vice president and national director of retail lending at the Federal Savings Bank.
How Can Lenders Find Out if You Owe Back Taxes?
Lenders can find out about your tax debt in a few different ways. First, lenders ask for recent tax returns as part of your mortgage application. They may notice discrepancies between the amount owed and your withholding or payments.
Also, lenders run a title search on your home, which reveals public liens. A Notice of Federal Tax Lien will also appear in other public records searches lenders may run during underwriting or in the days leading up to closing.
Ideally, a lender should learn about your tax debt from you. If you disclose your unpaid taxes at the start of the application process, the lender can advise you on ways to remove the obstacle and qualify for a mortgage. “The first thing (you) should do is call a loan officer and just give them the honest story,” Bader says.
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Can You Get a Mortgage With an IRS Payment Plan?
You may be able to get a mortgage with an IRS payment plan, depending on the loan program’s policies regarding tax debt. You’ll need to disclose the debt in your application, where it generally counts toward your debt-to-income ratio. And you’ll typically need to provide proof that you are making the installment payments as agreed.
Can You Buy a House if You Have a Tax Lien?
It’s possible to buy a house despite having a tax lien, but you’ll be restricted to certain loan programs. Here are the major programs’ policies:
— Fannie Mae. You can’t get a Fannie Mae loan if you have a Notice of Federal Tax Lien. If you have an IRS payment plan without a public tax lien, you can qualify as long as you are up to date on payments and make at least one payment before closing on the mortgage.
— Freddie Mac. You aren’t eligible for a mortgage if the IRS has recorded a Notice of Federal Tax Lien, but an IRS payment plan is acceptable if you are current on payments.
— Federal Housing Administration. A tax lien is acceptable if you’re in a payment plan and have made at least three months’ worth of payments. You can’t make payments in advance to meet this requirement.
— U.S. Department of Agriculture. You may be eligible for a USDA loan if you have a tax lien, as long as you demonstrate that you’re in an installment plan with the IRS and have made at least three months’ worth of payments. You can’t make payments in advance to meet this requirement.
— Department of Veterans Affairs. You can qualify for a VA loan if you have a tax lien and have a payment plan with the IRS and have made all on-time payments for at least the last 12 months. You will typically need to go through manual underwriting, which means closer scrutiny of your credit and finances.
If the loan program you’re interested in doesn’t allow tax liens, you may still have options. You could take out a personal loan or use a credit card to pay off the lien, although you will need to inform your loan officer and include that debt in your debt-to-income ratio. Or your mortgage lender might be willing to issue a loan that you could use to retire the lien at the closing table, provided you discuss the situation early enough in the process.
“We need to know ahead of time. If the day of the closing shows up, we’re not going to be able to arrange it,” Bader says.
[Read: Best Mortgage Refinance Lenders.]
Can You Refinance a Mortgage With a Tax Lien?
It’s often difficult to find a lender that will refinance if you have an existing lien, but there is a potential workaround. If your lender agrees, you can ask the IRS to subordinate your tax lien to the lender’s lien and refinance. You must make the application to the IRS at least 45 days in advance. The IRS might grant your request if you use cash from the refinance to pay off some of your tax debt or if the refinance gives you more room in your budget to pay what you owe.
While it can be hard to face unpaid back taxes, it’s better to deal with them sooner rather than later. Setting up a payment plan can help prevent a public tax lien and improve your chances of qualifying for a mortgage.
It’s also important to tell your lender about your tax debt, even if there isn’t a public lien yet. Failing to provide accurate information about your debts is loan fraud and, if discovered, your lender could accelarate the debt, meaning your balance would be due immediately. Plus, once you share the details of your unpaid tax bill, your lender might find a way you can rectify the situation and qualify for a home loan.
“There’s not a lot of good things that happen when you fail to disclose. But there are some good things that can happen when you do disclose,” Sorrell says.
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Can You Get a Mortgage When You Owe the IRS? originally appeared on usnews.com
Update 02/04/26: This story was previously published at an earlier date and has been updated with new information.
