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Tax Debt and Home Buying: Can You Purchase a New House if You Owe the IRS?

Owing the IRS can complicate your life in ways you may not even realize. For example, if you want to buy a new home, but have back taxes, you may find it difficult to secure a mortgage. This is especially true if the IRS has a tax lien in place. Although navigating the home-buying process is tricky with tax debt, it’s not impossible. There are things you need to understand, however, and steps you can take to make the journey easier. If you’re planning on purchasing a new home and owe the IRS, here’s what you need to know.

Will Tax Debt Prevent You From Buying a Home? Fact vs. Fiction

Although tax debt can undoubtedly pose challenges when purchasing a new home, it’s essential to separate fact from fiction. In this section, we’ll debunk some common myths surrounding tax debt and home buying.

Myth 1: Having Tax Debt Automatically Disqualifies You From Getting a Mortgage. Reality: Although tax debt can make it more difficult to secure a mortgage, it doesn’t necessarily preclude you from being approved. Lenders evaluate each case individually, taking into account factors such as the amount of debt, your overall credit profile, and your ability to manage financial obligations.

Myth 2: You Can’t Buy a Home Until Your Tax Debt is Paid in Full. Reality: Although it’s ideal to resolve tax debt before applying for a mortgage, some lenders may consider your application if you have an active payment plan in place with the IRS and have been consistently making payments for a specified period. VA loans, for example, require a minimum of 12 consecutive payments before they’ll consider your application.

Myth 3: Tax Debt Only Affects Your Mortgage Application if There’s a Tax Lien. Reality: Even without a tax lien, outstanding tax debt can still negatively impact your creditworthiness and debt-to-income ratio (DTI), which are crucial factors in mortgage approval.

Can You Sell a Home With a Tax Lien?

If you already own a home and have a tax lien placed on it due to unpaid taxes, you may be wondering if you can sell the property. Generally, it is possible to sell a house with a tax lien, but there are specific steps you need to take to ensure a smooth transaction.

When a tax lien is in place, the IRS has a legal claim on your property, and they must be paid from the proceeds of the sale before you can receive any remaining funds. One option is to work with a qualified real estate professional who has experience handling transactions involving tax liens. They can guide you through the process and ensure that the appropriate steps are taken to satisfy the lien and clear the title before the sale is finalized.

Alternatively, you may consider negotiating with the IRS to set up a payment plan or potentially have the lien released or subordinated. This means the lien is temporarily moved to a lower priority, allowing you to sell the property and use the proceeds to pay off your tax debt.

It’s important to note that selling a house with a tax lien can be a complex process, and failing to properly address the lien can result in legal complications and potential financial penalties. We highly recommend seeking help from a tax professional or a real estate attorney to ensure that you navigate the process correctly.

How Tax Debt Affects Your Ability to Qualify For a Mortgage

Qualifying for a mortgage when you have tax debt can also be tricky. One of the primary ways tax debt affects your mortgage qualification is through your DTI ratio. Tax debt is factored into this calculation, and a high DTI ratio can raise red flags. It could suggest that you may struggle to make timely mortgage payments on top of your existing financial obligations.

Furthermore, some lenders may have specific policies or guidelines regarding tax debt. For example, they may require that you have an active payment plan in place with the IRS. You may also need to make payments for a specified period before the lender will consider your mortgage application.

It’s also important to note that the amount of tax debt you owe can play a role in your mortgage qualification and rates. Larger amounts of tax debt may be viewed as a more significant risk by lenders, potentially making it more challenging to secure a mortgage. Even if you are approved, you’ll likely have to pay a higher interest rate because you pose a higher financial risk.

While tax debt can undoubtedly present challenges in the mortgage qualification process, it’s essential to be proactive and work towards resolving the debt. By taking steps to address your tax obligations and improve your overall financial profile, you can increase your chances of securing a favorable mortgage.

Steps to Resolve Tax Debt Before Buying a Home

If you’re planning to buy a new home but owe the IRS, there are some steps you can take to help increase your chances of getting a loan.

  1. Assess the Situation: Start by thoroughly reviewing your tax debt situation. Gather all relevant documentation, including notices from the IRS, and understand the specific amounts owed, penalties, and interest charges.
  2. Explore Payment Options: The IRS offers various payment options to help taxpayers resolve their debt. Consider setting up an installment agreement, which allows you to make monthly payments over an extended period. Alternatively, you may qualify for an Offer in Compromise, which enables you to settle your debt for less than the full amount.
  3. Negotiate With the IRS: If you’re facing financial hardship, don’t hesitate to negotiate with the IRS. You may be eligible for temporary relief, such as a partial payment installment agreement or a suspension of collection activities (Currently Not Collectible status).
  4. Seek Professional Assistance: Navigating tax debt can be complex, and seeking guidance from a qualified tax professional can be invaluable. Tax attorneys, enrolled agents, or certified public accountants (CPAs) can help you understand your rights, explore available options, and negotiate with the IRS on your behalf.
  5. Improve Your Credit Score: As you work towards resolving your tax debt, take steps to improve your credit score. This may include paying down other debts, correcting errors on your credit report, and maintaining a consistent payment history.

By taking these proactive steps, you can demonstrate to lenders that you’re actively addressing your tax debt and improving your overall financial well-being. This can increase your chances of qualifying for a mortgage and achieving your dream of homeownership.

Final Thoughts

Buying a new home when you owe the IRS may seem challenging, but it’s not impossible. You can navigate this journey successfully with the right knowledge, strategies, and professional assistance. Stay proactive, stay informed, and remain committed to resolving your tax debt, and you’ll be one step closer to achieving your homeownership goals.

If you’re dealing with tax debt and buying a new home, don’t hesitate to contact our team of experienced tax professionals. We offer personalized guidance and strategies to help you resolve your tax debt, improve your financial profile, and increase your chances of securing a favorable mortgage. Call 855-476-6920 to schedule a free consultation today.