Can You Buy a House If You Owe Taxes?

Owing money to the IRS can make it harder, but not impossible, to buy a house. The primary hurdle is finding a bank willing to lend you money for the purchase. Before approving a home loan, a bank will likely require you to address any liens and make arrangements for paying off the tax balance.

If your IRS tax debt is getting in the way of buying a home, America Tax Group is ready to assist. Learn more about how our tax professionals can help you deal with unpaid taxes to make your dream of owning a home come true.

Key Takeaways

• Buying a home is possible – Unpaid taxes make it more difficult, but not impossible, to borrow money to buy a home.
• Unpaid taxes affect loan approval – Tax debts can signal potential issues with an applicant's creditworthiness, the existence of tax liens, and/or indicate one or more unfiled income tax returns.
• Addressing the back taxes – The taxpayer needs to make arrangements with the IRS to pay off the tax debt and address any tax liens.
• A tax professional can help – Talking to a tax pro can help confirm the existence and amount of any tax debts, set up a payment plan, and resolve any tax liens.

Buying a Home When You Owe Taxes

Unless you're paying cash, having a tax debt with the IRS or other tax agency can make it harder to buy a house due to:

• Credit risk
• Tax liens
• Unfiled tax returns

Read on for more details about how each of these elements affects the process of obtaining a mortgage and buying a home.

How Tax Debt Affects Credit Risk

A lender will view you as a bigger credit risk the more financial obligations you have. This can include things like a tax debt, car loans, or utility bills. When deciding whether to approve your loan and its terms (such as the interest rate), the lender tries to estimate the chances of default (the borrower stops making payments). The more debts you have (with the IRS or other creditors), the greater this risk, at least in the eyes of the lender.

One way lenders determine this risk is to calculate your debt-to-income (DTI) ratio. This compares how much debt you have in relation to your income. The more you earn in relation to your total debt, or the smaller your debt is in relation to your income, the more likely a lender will approve your loan.

Another thing to keep in mind is that there's a difference between resolved and unresolved debt. A tax debt is less likely to prevent you from buying a house if you've made arrangements to pay off that debt and have been consistent in making payments.

For example, some financial institutions will approve a home mortgage even with a tax debt if a borrower sets up a payment plan and makes at least three consecutive monthly payments. Other lenders may require 12 months of on-time payments, though.

If a tax debt is unresolved, meaning you're basically ignoring it, you're far less likely to get approved for a house loan. Home lenders are afraid that other creditors will be "first in line" to collect any of your debts, leaving nothing left for the home lender to recover if you default on your mortgage.

Why a Tax Lien Can Be a Problem

Tax liens are problematic because most home loans work by using the home as collateral in case the borrower defaults. If there's a tax lien in place, the IRS or other tax agency has "dibs" on the home for paying off the tax debt, with the lender only having rights to whatever value is left after the tax debt gets paid off.

If the IRS files a tax lien against your property, it applies to all of your current and future property, including a new home. Banks know this, so they won't agree to offer you a mortgage unless you either remove the tax lien or subordinate it.

Subordination refers to lowering the priority of the lien. A bank might agree to loan you money to buy a house as long as its legal right to use your house as collateral is prioritized over the tax lien. In other words, if you default on your mortgage, your bank has the right to foreclose on your home without interference from the IRS.

Is It Possible To Get a Mortgage With Unfiled Tax Returns?

Yes, it's possible to get a mortgage without tax returns, but it's more difficult. The primary reason is that many lenders ask loan applicants to provide recently filed income tax returns to verify their income. Tax returns are also a way for lenders to find out if you owe taxes.

Some lenders will accept other forms of income verification, such as pay stubs and IRS Form W-2s. The exact rules and requirements depend on the lender and the type of income the borrower earns.

How Tax Debt Affects Different Types of Home Loans

Below is a chart that summarizes how an unpaid tax balance can affect commonly used loans for home purchase.

What To Do If You Want to Buy a House With a Tax Debt

If you want to borrow money to buy a home with an outstanding tax bill, there are several things you need to do:

• Figure out how much you owe and if there's a tax lien in place.
• If there's a tax lien in place, get it withdrawn, discharged, or subordinated.
• Have a plan to pay off your tax debt, either with a lump sum or over time with a payment plan.

Calculating How Much You Owe and Confirming if There's a Tax Lien

If you haven't set up a payment plan or set up another tax resolution method, there should be one or more tax notices or letters that tell you how much you owe. If you don't have this information, you can obtain your official tax transcripts. These should summarize your tax account and provide an account balance. The transcripts should also provide information that can help you confirm if you have any missing tax returns or if there's an IRS tax lien.

If you're missing any tax returns, you need to file your returns as soon as possible to avoid potential penalties and interest. Hopefully, you'll have the necessary income and tax papers handy to do this, but if you lost them (or never received them), a tax professional can help with tax record reconstruction.

Lien Removal

If the IRS has filed a tax lien against your property, most lenders will need you to remove the lien before approving your loan. The three main ways to do this include:

• Discharging the lien. This effectively removes the lien from a specific piece of property.
• Subordinating the lien. This lowers the tax lien's priority, allowing lenders to use the home you want to buy as collateral for the home loan.
• Withdrawing the lien. This removes the Notice of Federal Tax Lien, so all of your property is no longer encumbered by the lien. The underlying tax debt still remains, however.

Setting Up a Payment Plan

Tax debt doesn't prevent you from buying a home, but you'll need to set up a payment plan:

The bad news: most lenders won't approve your loan request if you have a delinquent tax debt. The good news: if you set up a plan to pay your tax debt over time and don't make any late payments, many lenders may still approve you for a home loan.

One of the best ways to pay off a tax debt over time is with an installment agreement or payment plan. The catch is that the bank may include your monthly tax payments when calculating your DTI ratio and assessing your overall creditworthiness. Consulting with a tax pro that handles unresolved tax debts can help set up a payment plan and confirm the existence of other tax relief options.

Get Unpaid Tax Help from America Tax Group

You can buy a house if you owe taxes, but not if you have delinquent tax debt. You'll usually need to make payment arrangements with the IRS and resolve any tax liens before getting approved for a mortgage.

If you'd like help with this process, America Tax Group can help. Whether you owe for a single year or haven't paid taxes in years, we understand that everyone deserves to own a home, even with unpaid tax problems. Contact us to get started.