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Owing federal tax debt makes it harder to get approved for a mortgage, but it’s not impossible to get a home loan with this debt factored in. With careful planning, you can still get the loan you need despite paying back taxes to the IRS. As the gig economy booms and side hustles take off, delinquent tax debt is becoming a common issue among potential homebuyers. With more than 11.23 million Americans owing the IRS back taxes, lenders like us are eager to provide clear steps forward for borrowers with delinquent tax debt. If you deal with your tax debt early, it won’t derail your plans to buy a home. You’ll have far more paths forward if you handle the debt before it becomes a tax lien. If your debt does escalate to a tax lien, your path forward is more limited. Even still, you can get approved for a mortgage. Regardless of your tax debt status, keep in mind that it’s not insurmountable. We’ve outlined the four steps to getting a mortgage if you owe back taxes to the IRS down below. Check out our resources, then schedule a call with one of our loan experts to discover how NewCastle can help you get approved.
You have fewer options for repayment at the lien stage because the debt has already gone unpaid. The lien is also what a lender will likely see as a major red flag and may cause them to deny your mortgage altogether.
Regardless, understanding the status of your IRS debt will help prepare you for a conversation with your lender and can help you get back on track toward your future mortgage.
To move forward with your loan, your next step is to discuss possible solutions toward resolving your debt so you can get approved.
Once you understand your debt’s classification, the next step is to contact the IRS and discuss a solution that fits your financial situation and your plans:
The best and fastest way to get rid of delinquent tax debt is to pay it in full before you intend to close on your home. Talk with the IRS to get your payoff amount for the total debt owed, then pay the IRS directly to completely resolve the debt.
Make sure you talk with your lender about what proof they’ll need that you’ve paid off the debt, and then provide your lender with that documentation, including your payoff amount and payment receipt. The lender will double-check that the debt is fully paid and that the IRS has released any liens in your name.
With the debt paid outright, you’ve taken care of this potential hurdle to your status as a homebuyer. You can move forward with the mortgage process and receive your loan.
Depending on your financial situation and how much you owe, you may be unable to manage a full payment to the IRS to resolve your debt. If you can’t repay the entire debt before closing, your best bet is to set up a repayment plan with the IRS.
Talk with the IRS about your repayment options, and pick a plan to help you proactively address the debt. Keep in mind that it takes some time for the IRS to process and formalize your repayment agreement—so you don’t wait until it’s time to close on your new home to set up the plan. In the case of IRS debt, it’s best to take charge and be transparent with your lender about this process.
Once your repayment plan is in place, start making on-time payments per your agreement with the IRS. As you do, you’ll receive paperwork showing that you’ve actively made payments and are keeping up with the agreement. You can provide a copy of the agreement to your lender—including the monthly payment amount and total amount due—along with evidence that you’re up-to-date with the payments.
Your lender will need this proof that you’ve begun paying off your tax debt to approve your mortgage. The requirements for established payments differ based on the type of loan you’ll need:
Remember that this repayment agreement may change your loan calculations and impact how much you can afford. Because you have a formal repayment agreement with the IRS that you’ll pay each month, your lender will include this monthly payment amount as part of your monthly debt obligations. This may increase your debt-to-income ratio (DTI) and impact how much you can afford to borrow:
Richard wants to buy his first home and take advantage of an FHA loan as a first-time homebuyer. Even though he has a full-time job where his taxes are taken out of each check, Richard underestimated the income he’d receive from his side business as a videographer—he owes the IRS $7,500 in back taxes. Richard needs to either pay his delinquent tax debt in full or set up a repayment plan with the IRS before he can get approved for a mortgage.
Because Richard plans to use his savings for the down payment on his new home, he doesn’t want to pay the total debt out of pocket. Instead, he sets up a repayment plan with the IRS that will allow him to pay down the debt in monthly installments. When the agreement is in effect, he makes his payments on time each month and keeps all documentation related to his repayment.
After three months of on-time payments, Richard can be approved for his mortgage if he verifies his repayment agreement with the IRS and his good payment history. When Richard applies for his loan, he includes a copy of the agreement and his statements with his application documents.
Richard makes $4,000 from his full-time job and, on a two-year average, about $2,000 of taxable income each month from his self-employment. We use his total monthly income of $6,000 to determine Richard’s eligibility for the loan.
In terms of debt, Richard owes monthly payments toward his car loan, his student loans, and his IRS repayment agreement. Our loan experts will factor these debts in, along with his future mortgage costs, when qualifying him for the loan:
