How to Secure a Home Loan When Dealing With a Tax Lien

In most cases, mortgage lenders are willing to look past certain types and amounts of debts. However, when it comes to tax liabilities, things can get complicated in a hurry. If you’re behind on your federal income taxes, the IRS might place a lien on your property and assets, which can be especially concerning for lenders.

Thankfully, there are certain actions you can take to eliminate your tax issues and move forward with the home of your dreams. Read on to learn more.

Resolving a Tax Lien

If you have received an official lien notice from the IRS, you have 10 days to pay the amount in full. After that, the lien becomes public record and will appear on your credit report.

So, if you have the means to pay off your liability before the lien takes effect, we strongly recommend doing so. If not, a tax lien could wreak havoc on your credit for years, even after you’ve resolved it. A lien can especially create problems when you apply for a government-backed mortgage, like an FHA or VA loan. In lieu of paying off the liability in full, the second-best option is to pay as much of it as possible by setting up a payment arrangement with the IRS before they officially file the lien.

For borrowers serving in the military, you might be able to obtain a VA mortgage under two conditions:

You establish a repayment plan with the IRS and make timely payments for 12 consecutive months
You meet the IRS’ debt-to-income requirements

As you work to resolve the lien, continue to monitor your credit score and make all your payments on time.

The Difference Between FHA and Fannie Mae/Freddie Mac Financing

Borrowers who finance their home loans through the FHA are not required to have their tax liens paid in full unless the IRS is in first lien position (meaning they are first in line to benefit from any liquidation of assets to satisfy debts). However, even in some instances where the IRS is in first position, the IRS might be willing to let other creditors move ahead (also known as subordinating).

Note that you must include a copy of the repayment agreement and a record of consistent previous payments in the documentation for your debt-to-income ratio. In most cases, the lender will request evidence showing that there is no exception to a subordinated tax lien.

When dealing with Fannie Mae or Freddie Mac financing, however, you must pay all tax-related liabilities prior to closing. Exceptions to this are exceedingly rare, as traditional lenders do not want their lien position to be compromised.

Updates to the Lien Threshold and Processes

Thankfully, the IRS is trying to cut down on tax liens. They have increased the lien threshold, expanded Offer in Compromise (OIC) eligibility, and promised to provide more small business installment agreements.

Best of all, the IRS is now able to withdraw liens on tax liabilities less than $25,000 if you establish a Direct Deposit Installment Agreement. You can usually secure one of these agreements after making just three consecutive months of on-time payments, and doing so can drastically improve your loan status. If you already have an existing installment agreement, you can convert it to a direct debit agreement and start making regular payments directly from your bank account.

S.H. Block Can Help You Resolve Your Tax Liability and Secure a Home Loan

As you can see, an IRS lien could have significant consequences if you’re looking to purchase a new home. However, by setting up a convenient and affordable payment plan, you might be able to overcome your existing tax liability. Better yet, you may be able to work with the IRS on an offer in compromise to resolve the debt for less than you owe.

Regardless of the amount you owe or the status of your lien, please contact S.H. Block Tax Services for help resolving your tax problems and securing a home loan. Our staff has decades of combined tax experience, and we have earned an A+ rating with the Better Business Bureau based on our record of providing outstanding service for our clients. Please call (410) 872-8376 or complete this brief form to schedule your free consultation today.

Remember, once the IRS sends you a notice of lien, you only have 10 days to resolve the issue or enter into a repayment arrangement, so don’t wait to call us if you need help!

The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.