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For mortgage lenders, your debt is not a deal-breaker – up to a certain point. Even the nasty stuff like judgments and collections won’t necessarily keep you from getting a mortgage.

But life can get a bit more complicated when it’s Uncle Sam you owe.

Failing to pay your federal income taxes can lead to the Internal Revenue Service placing a lien on your property or your assets. These legal tools protect the government’s ability to get its money. They also set off alarm bells for lenders.

The good news is the presence of a federal tax lien doesn’t automatically ruin your home-buying chances. It’s almost always more a matter of what you’re doing to make the lien go away.

Loan Complications

Federal tax liens hit a peak of 1.1 million in the 2010 fiscal year, according to the IRS taxpayer advocate service. New initiatives meant to help delinquent taxpayers avoid liens have since cut into that peak considerably.

But hundreds of thousands of Americans are still hit with one each year. Once you’ve received official notice, you have 10 days to pay before the IRS can file for a lien.

These public records also find their way to your credit report. Tax liens can make it tough to secure many types of credit and even linger after a bankruptcy discharge. Federal debt can be especially problematic when you’re seeking a government-backed mortgage like an FHA or VA loan.

The best solution is to pay off the lien before you fill out a loan application. But if that’s not something you’re able to do, you still might be able to forge ahead, provided you’ve actually tried to make a dent in that debt.

Lenders can view liens differently depending on the loan type and other factors. But in general, military borrowers with a tax lien, for example, may be able to obtain VA mortgage preapproval if:

  • They have an acceptable repayment plan with the IRS and have made on-time payments for at least the last 12 consecutive months.
  • They can satisfy all debt-to-income (DTI) ratio requirements with that monthly tax repayment included.
  • They note their outstanding tax lien on the standard loan application.

Even with all of those conditions, consumers with tax liens may have some additional hurdles to clear to satisfy underwriters.

Additional Requirements

A tax lien can make it difficult for lenders to process a loan file using an automated underwriting system. The alternative is what’s known as a “manual underwrite,” which can involve a closer look at your financials and tighter requirements, such as a lower allowable DTI ratio.

So, if you’re a prospective homebuyer with a tax lien, a good first step is making sure your track record shows at least a year’s worth of on-time payments. Pay it off in full if possible, but if that’s a tall order, know that you might have diminished purchasing power and a rockier road until the slate is clean.

In the meantime, you should also be keeping tabs on your progress by checking your credit reports regularly (which you can get for free once a year from each of the three major credit reporting agencies), and monitoring your credit scores for increases — or drops. (Credit.com offers a free tool that allows you to check your score and get a summary of your credit profile on a monthly basis.) Taking an active role in your credit can help you get on track to buy a home, especially when you’re facing certain financial hurdles.

Image: George Doyle

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  • Fay Gunn

    This was VERY HELPFUL, thanks so much!!!

  • Sandra

    What if I do not have a tax lien but simple owe taxes that I make a monthly payment on? It is an established payment plan. I’m on time every time.

  • http://www.veteransunited.com/ Chris Birk

    @Sandra: Different lenders may have different requirements. The payments would be counted in your DTI ratio calculation. And some lenders may require you to have a least 12 consecutive months of on-time payments. Having an outstanding tax lien could also mean you encounter tighter requirements in order to obtain financing. But it’s possible to make it work.

    • Sandra

      You’re right Chris, that’s why I got different answers. Each place had different requirements. Thanks for your response.

  • http://www.Credit.com/ Gerri Detweiler
  • http://www.Credit.com/ Gerri Detweiler

    @the lastros – At this point you’re deep in the loan process and your broker should be answering these questions since he’s familiar with the lender’s requirements.

  • http://www.veteransunited.com/ Chris Birk

    @Bob: Thanks for writing. Did you file already with the IRS, and do you plan to repay this in full by April 15?

    • SavaDude

      Hey Chris –
      Bob never got back to you here, but I am in a similar situation.
      I have to file an amended return for 2013 and I filed for an extension for 2014. I will owe about 40k upon filing and will not be able to pay it immediately. I need to apply for my loan in June. What is that going to do to me? Am I just going to have to wait a year or so until I have paid some of that debt? At present there is no Lien. I plan to file in the next two weeks. At which point I will get my team to negotiate with the IRS. I am hoping I can still get a loan!

  • L.O.

    The IRS is the only institution that can jump in front of a mortgages required and coveted 1st Lien Position on Title. For this reason, many lenders will not allow an open, paid on-time IRS lien to go through. Even w/a subordination agreement from the IRS. Each lender has different appetites for risk. Shop a bank, broker and Credit Union to see where they are at w/this subject.

  • Norma

    I owe state taxes in one state and reside in a different state. How does this affect me when purchasing a home?

    • http://www.Credit.com/ Gerri Detweiler

      Have you checked if there is a tax lien on your credit reports? If not,
      free annual credit reports to check. A tax lien is negative, regardless of where it originated.

  • Michael

    I owe the feds approx $30k. I DO NOT HAVE A LIEN. Will this affect my ability to get a mortgage? If there isn’t a lien is there any way for an underwriter to find the debt?

    • http://www.veteransunited.com/ Chris Birk

      @Michael: Thanks for writing. It’s difficult to say without more information. Are you on some manner of repayment plan?

      • Michael

        Yes I am under a repayment plan, however having just filed my taxes a payment has not been due/made yet.

  • Jeanine Skowronski

    You may want to consult a tax accountant or attorney about your best recourse here.

    Thank you,

    Jeanine

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