If you’re hoping to buy a house but currently owe taxes, you may be wondering if the path to homeownership is even possible. Although you can buy a house if you owe taxes, your tax debt may make it more difficult to get a mortgage if it turns into a tax lien.
Navigating the home-buying process with tax debt can be tricky, so we’ve answered some common questions about how tax debt and liens can affect your home purchase and home loan approval. Don’t forget to check out our tips for buying a house when you owe taxes so you can make moves toward your dream home.
Preparing to buy a home and want to stay on top of your taxes? Plan to file with TurboTax so you know that your taxes are done right.
How Does Tax Debt Affect Buying a House?
If you owe taxes to the IRS and don’t pay them by the date listed on your federal tax return, those taxes become tax debt. Tax debt is also created when you fail to correct a mistake or make a requested change on your tax return. You’ll know if you have tax debt 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 turns into a tax lien, which can have a negative effect on your loan application. Learn more about how a tax lien impacts the home-buying process below.
How Does a Tax Lien Affect Buying a House?
If you’ve left your tax debt unpaid long enough, the government may register it as a tax lien. A tax lien is when the government lays legal claim to your personal property after you’ve failed to repay your tax debt. Having a tax lien makes buying a house more difficult because it negatively impacts your loan application in several 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 liens may make you ineligible for a conventional loan depending on where you’d like to buy your home.
Say you have a federal tax lien in your home county and wish to buy a new house in that same county. Because the IRS would have the first lien or claim on any property you own, a lender would see you as ineligible for a mortgage until your lien is removed and debt paid off.
Mortgage lenders typically need the first claim to your house if you’re unable to repay your loan. However, if you have a lien placed in one county but plan to buy a house in another county, you’d likely still be eligible for a conventional home loan.
Liens from the IRS are filed by county and take priority in the county in which they’re filed. If you plan to purchase a home in another county, a mortgage lender’s legal claim on your property would have priority over the IRS.
Other Ways a Tax Lien Affects Buying a House
When a lien is placed, a public notice is also sent to creditors, and this can negatively impact your credit scores. In addition to hurting your credit score, tax liens make it harder to get approved for a mortgage. Lenders may see unpaid taxes as a sign that your mortgage will go unpaid as well and view you as a risky applicant.
With risk characterizing your credit history, you’re less likely to be approved for a mortgage, and some lenders may even disqualify your application. It’s not impossible to obtain a mortgage with a lien, but it’s likely that any home loan you get approved for will have a higher interest rate because of your risk.
Make sure to be upfront with your lender if you are applying with a lien because this will help you discuss your options.
Can You Buy a House if You Haven’t Filed Taxes?
It’s possible to buy a house without filing your taxes, but it will make securing a mortgage much harder. Most lenders require proof of employment income using pay stubs, W-2 forms, and signed tax returns from the last two years.
If you haven’t filed your taxes, it will be impossible to produce documents like tax returns for a mortgage application. Not everyone needs to file taxes, but if you make enough income to buy a home, it’s likely that you also earn enough to pay taxes.
Is It Possible to Get an FHA Loan With Back Taxes Owed?
A Federal Housing Administration (FHA) Loan is a government-backed loan that makes it easier for borrowers with less-than-ideal credit to get a mortgage. They’re easier to qualify for than conventional loans and allow for down payments as low as 3.5%.
To get an FHA Loan while you owe taxes, you’ll have to undergo a manual underwriting process. In this process, the loan underwriter will analyze your finances using documents like your tax returns or bank statements.
If you owe back taxes, the underwriter will verify if you have a valid repayment plan with the IRS. You’ll also need to prove that you’ve made on-time payments on this plan for at least three months.
Once you’ve done this, you’ll need to submit a form to the IRS to request that they subordinate their lien priority so the FHA can have first priority on any property. This makes it so the FHA is the first line to claim your property if you aren’t able to repay the loan.
Can I Get a VA Loan With a Tax Lien?
Military borrowers can get help on their home purchase through a VA Loan or a mortgage that is partially guaranteed by the Department of Veterans Affairs (VA). If you’re a military borrower that also has a tax lien, you’re still eligible for a VA loan as long as you fulfill the following conditions:
- You’re enrolled in a repayment plan for your tax debt with the IRS
- You’ve made on-time payments on your plan for the last 12 months
- You meet all debt-to-income ratio requirements (tax repayment plan included)
- You make 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 you apply for a home loan. These documents verify your identity and demonstrate your ability to pay back a loan.
Oftentimes, lenders will require recent tax returns as proof of employment and they’ll check your credit history. During this process, they’ll be able to see if you owe tax debt or if there’s a notice of a tax lien placed on you by searching public records.
Tips for Buying a House With Back Taxes Owed
Whether you owe back taxes or your tax debt has progressed into a tax lien, it’s still possible for you to get financing to buy a house. 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 difficulties when trying to buy a house while you owe taxes is to pay off your tax debt before applying for a home loan. Paying off your tax debt in full prevents it from progressing into a tax lien, which can negatively affect your credit history and mortgage application.
If you already have a tax lien, eliminating your tax debt is the first step to removing the lien. After you’ve 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 discharged.
Set Up a Payment Plan With the IRS
If you’re not able to pay your tax debt in full, it’s possible to set up a repayment plan with the IRS. This allows you to pay your debt in installments until it’s resolved. With a payment plan, you’ll still be held accountable for any tax penalties incurred, but it will help you apply for a loan.
It’s important that you work on getting a payment plan with the IRS as soon as you know that you want to buy a home. The IRS has a lengthy process for formulating repayment agreements, and you often need to show lenders that you’ve made on-time payments for three to 12 months.
Enrolling in a payment plan in advance will allow you to gather all the documentation you need to show a lender. From there, you’ll work with lenders to discuss your loan options.
Talk With a Tax Professional
Still have unanswered questions about how tax debt and tax liens affect the home-buying process? Use TurboTax Live to get access to tax experts year-round and get answers to your questions. Experts are available in English and in Spanish, so you can get the help you need when it comes to tackling tax debt or liens.
Ask Your Lender For Advice
When you’re trying to buy a home with tax debt, it’s important to get help for your specific situation. First, talk to your lender about what specific requirements you need to meet to qualify for a mortgage.
It’s wise to be upfront about your situation as a demonstration of good faith. They’ll be able to give you the best advice on how to move forward with a loan application whether you have tax debt or a tax lien.
You can still buy a house even if you owe taxes to the government. Tax debt makes the process of applying for a loan more complicated, especially if your debt has transitioned into a tax lien. If you find yourself in this position, use the answers and tips in this post to help you purchase a home.
Paying your taxes on time helps you avoid the trouble of tax debt and liens altogether. TurboTax maximizes your tax deductions and makes sure you file accurately, so you know whether you owe taxes or can count on a refund.
Don’t forget to leverage our TurboTax Live tax experts for help with any questions you have along the way.