If you are hoping to buy a home but are currently owes taxes, you may be wondering if the path to homeownership is even possible. While you can buy a home if you owe taxes, your tax debt can make it more difficult to get a mortgage if you become a tax lien.
Navigating the home buying process with tax debt can be complicated, so we’ve answered some common questions about how tax debt and liens can affect your home purchase and mortgage loan approval. Don’t forget to check out our tips for buying a home when you owe taxes so you can move toward your dream home.
Are you preparing to buy a home and want to be on top of your taxes? plan to present with TurboTax so you know your taxes are done right.
How does tax debt affect buying a home?
If you owe taxes to the IRS and do not pay them by the date shown on your federal tax return, those taxes become Tax debt. Tax debt is also created when correct a mistake or make a requested change to your tax return. You’ll know if you owe taxes because the IRS will send you urgent notices requesting payment.
The good news is that it’s still possible to get approved for a mortgage if you have tax debt, but if you leave your tax debt unpaid, it becomes a tax lien, which can have a negative effect on your loan application. Learn more about how a tax lien affects the home buying process below.
How does a tax lien affect the purchase of a home?
If you have left your tax debt unpaid for a long time, the government can record it as a tax lien. A tax lien This is when the government legally reclaims your personal property after you have failed to pay your tax debt. Having a tax lien makes buying a home more difficult because it negatively affects your loan application in a number of ways.
Below, we discuss how having a tax lien affects your conventional loan eligibility, credit score, and risk as a loan applicant.
Can you get a conventional loan with a tax lien?
tax links can make you ineligible for a conventional loan depending on where you would like to buy your home.
Let’s say you have a federal tax lien in your home county and you want to buy a new home in that same county. Because the IRS would have the first lien or claim on any property you own, a lender would consider you ineligible for a mortgage until the lien is removed and the debt is paid.
Mortgage lenders usually need the first claim on your home if you are unable to pay your loan. However, if you have a lien placed in one county but plan to buy a home in another county, you may still be eligible for a conventional home loan.
IRS liens are filed by county and have priority in the county in which they are filed. If you plan to buy a home in another county, a mortgage lender’s legal claim on your property would take precedence over the IRS.
Other Ways a Tax Lien Affects a Home Purchase
When a lien is placed, a public notice is also sent to creditors, and this can negatively affect your credit scores. In addition to hurting your credit score, tax liens make it harder to get a mortgage approved. Lenders may see unpaid taxes as a sign that your mortgage won’t be paid either, and see you as a risky applicant.
With the risk that characterizes your credit history, you are less likely to be approved for a mortgage, and some lenders may even disqualify your application. It’s not impossible to get a mortgage with a lien, but any home loan you’re approved for is likely to carry a higher interest rate because of its risk.
Make sure you are honest with your lender if you are applying for a lien because this will help you weigh your options.
Can you buy a house if you haven’t filed taxes?
It is possible to buy a house without filing taxes, but it will be much more difficult to get a mortgage. Most lenders require proof of earned income through pay stubs, W-2 formsand signed tax returns of the last two years.
If you haven’t filed your taxes, it will be impossible to produce documents such as tax returns for a mortgage application. Not everyone needs to file taxesBut if you earn enough income to buy a home, chances are you’ll also earn enough to pay taxes.
Is it possible to get an FHA loan with back taxes owed?
A Federal Housing Administration (FHA) Loan It is a government-backed loan that makes it easier for borrowers with less than ideal credit to obtain a mortgage. They are easier to qualify than conventional loans and allow down payments as low as 3.5%.
To get an FHA loan while you owe taxes, you will need to undergo a manual subscription process. In this process, the loan subscriber will analyze your finances using documents such as your tax returns or bank statements.
If you owe back taxes, the insurer will check to see if you have a valid payment plan with the IRS. You will also need to show that you have made timely payments on this plan for at least three months.
Once you have done this, you will need to submit a form to the IRS to request that they subordinate your lien priority so that FHA can have first priority on any property. This makes FHA the first line to claim your property if you can’t pay the loan.
Can I get a VA loan with a tax lien?
Military borrowers can get help buying their home through a VA Loan or a mortgage that is partially guaranteed by the Department of Veterans Affairs (VA). If you are a military borrower who also has a tax lien, you are still eligible for a VA loan as long as you meet the following conditions:
- You are enrolled in a payment plan for your tax debt with the IRS
- You have made timely payments on your plan in the last 12 months
- Meets all debt-to-income requirements (tax payment plan included)
- Take note of your tax lien on your VA loan application
How do lenders know you owe taxes?
Mortgage lenders require a variety of documents when applying for a home loan. These documents verify your identity and show your ability to repay a loan.
Lenders will often require recent tax returns as proof of employment and will check your credit history. During this process, they will be able to see if you owe a tax debt or if a tax lien has been imposed on you by searching public records.
Tips for Buying a Home With Back Taxes Owed
Whether you owe back taxes or your tax debt has become a tax lien, you may still be able to get financing to buy a home. Tax debt makes the road to homeownership more difficult, so it’s best if you have a plan to set yourself up for success.
Try using the tips below to help increase your chances of getting approved for a mortgage when you owe taxes.
Eliminate your tax debt
The best way to avoid pitfalls when trying to buy a home while you owe taxes is to pay off your tax debt before applying for a home loan. Paying your tax debt in full prevents it from becoming a tax lien, which can negatively affect your credit history and mortgage application.
If you already have a tax lien, removing your tax debt is the first step in removing the lien. Once you have paid your tax debt, the IRS will release your lien within 30 days. Plan to factor this time into your home buying process and apply after your lien is removed.
Set up a payment plan with the IRS
If you are unable to pay your tax debt in full, it is possible to set up a payment plan with the IRS. This allows you to pay off your debt in installments until it is resolved. With a payment plan, you will still be responsible for any tax penalties you incur, but it will help you apply for a loan.
It is important that you work to get a payment plan with the IRS as soon as you know you want to buy a home. The IRS has a lengthy process for formulating payment agreements, and often you must show lenders that you have made on-time payments for three to 12 months.
Signing up for an advance payment plan will allow you to gather all the documentation you need to show to a lender. From there, you’ll work with lenders to discuss your loan options.
Talk to a tax professional
Still have unanswered questions about how tax debt and tax liens affect the home buying process? Use Live TurboTax to gain access to tax experts throughout the year and get answers to your questions. Experts are available in English and Spanish, so you can get the help you need when it comes to addressing tax debts or liens.
Ask your lender for advice
When you’re trying to buy a home with a tax liability, it’s important to get help for your specific situation. First, talk to your lender about the specific requirements you must meet to qualify for a mortgage.
It is wise to be honest about your situation as a show of good faith. They will be able to give you the best advice on how to move forward with a loan application, whether you have a tax debt or a tax lien.
You can still buy a house even if you owe taxes to the government. Tax debt makes the loan application process more complicated, especially if your debt has become a tax lien. If you find yourself in this position, use the answers and tips in this post to help you buy a home.
paying your taxes in time helps you avoid the problem of tax debt and liens altogether. TurboTax maximizes your tax deductions and makes sure you file your return accurately, so you know if you owe taxes or can count on a refund.
Don’t forget to take advantage of our TurboTax Live Tax Experts for help with any questions you have along the way.
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