Can I get a mortgage if I owe money to the IRS?
This is a question we hear all the time here at Patriot Tax Pros. The short answer is: It depends!
First off, let’s look at what Fannie Mae has to say about it:
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:
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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.
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The lender obtains the following documentation:
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An approved IRS installment agreement with the terms of repayment, including the monthly payment amount and total amount due; and
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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.”
So what does all that mean?
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So long as the IRS has not filed a lien against you.
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You must show proof that you have a formal agreement with the IRS.
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You must show proof that you have been paying your installment agreement and are current with the agreement.
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The monthly payment amount of the installment agreement will be included in your debt-to-income ratio.
So when is a lien filed?
If you owe more than $50,000 to the IRS you can be assured that the IRS has or will soon file a lien against you.
If you owe less than $50,000 you do not have to worry about the IRS filing a lien again your. However your mortgage lender will still require that the balance you owe is on a payment plan with the IRS and that it is being paid on time. Additionally, the monthly payment amount will still be included in your debt ratio. For example, you owe the IRS $20,000 and your payment is $280 per month. The $280 will be included with your other bills such as your auto payment, credit card bills, and student loans to determine that loan amount you are approved for.
What if I Owe More Thank$50,000 and a Lien Has Already Been Filed?
If you have the ability to pay the IRS debt down to $50,000 you can petition the IRS to remove the active lien. You will still be required to maintain a direct debit installment agreement for the remaining balance. In most instances, your mortgage lender will want to see that the tax lien has been removed for at least one year.
What If I Owe More Than $50,000 and No Lien Has Been Filed?
When you are in the process of obtaining final loan approval your mortgage lender will require that you sign IRS Form 4506T Request for Account Transcripts. Those transcripts will indicate that you have a balance due with the IRS at which point the underwriter will demand proof of installment agreement and payment.
If you are not currently on an installment agreement you will need to establish one immediately. Once you establish and installment agreement, the IRS will place a lien against you if the balance is owed of greater than $50,000. At this point your loan application will be declined.
So What Can You Do About It?
Technically, you could pay the balance down to $50,000 then go on installment agreement for the remaining balance. In most instances, the payment on the remaining $50,000 will be approximately $695 per month. Your monthly payment of $695 must be set up on a direct debit from your bank account. So long as you can afford an extra $695 in your debt to income ratio analysis, you can still be qualified for a mortgage and not have the IRS debt affect your ability to obtain a mortgage.
So there you have it… If you owe less that $50,000 you are usually okay but you may qualify for a lesser amount. If you owe more than $50,000 and a lien has already been filed then you may need to wait at least a year after the balance has been paid down and the lien has been removed. If you owe more than $50,000 and no lien has been filed then you will need to pay the balance down and establish a monthly installment agreement.
Easy, right? Well no one ever said home ownership was easy!
For more information on lien removals, debt settlements, and other IRS tax resolution contact Patriot Tax Professionals and speak to a licensed tax expert today!
