Can You Buy a Home If You Owe Taxes?

Can you buy a home if you owe the IRS tax money? It’s possible in some cases, but not in others. Most mortgage lenders will not approve you for a loan unless you have a payment plan on the tax debt. If you are ignoring your tax debt, you will not be able to get a loan from most banks, but there may be alternative lenders who are willing to work with you. If you have cash, you can buy a home, but eventually, the IRS may issue a tax lien for the unpaid taxes, and that will attach to your new home.

However, every financial situation is different. Paying off your tax debt may be a wise priority before trying to get approved for a mortgage. There are ways to overcome your tax problems while still being able to meet your life goals. Learn everything you need to know about owing the IRS and buying a home below.

Key Takeaways

• If you owe taxes, it’s possible to buy a home, but lenders will look at your complete financial situation and consider your debt-to-income ratio.
• Lenders may be willing to work with you if you are under a payment plan with the IRS.
• If the IRS has filed a tax lien, it may need to be subordinated or withdrawn so that you can buy a home. 
• If you inherit a home and owe tax debt, tax liens and levies may put it at risk.
• The IRS is required to remove liens or levies if you pay off your tax debt.
• Pursue tax relief options like an offer in compromise, installment agreement, or CNC status so you can get back in good standing with the IRS before buying a home.

Can You Buy a House if You Owe Taxes?

The short answer is yes, you can absolutely purchase a home even if you owe the IRS tax debt. Many lenders will work with you as long as you have an existing payment plan with the IRS, but they consider the payments when calculating your debt-to-income ratio. 

If you have tax debt, one option is pursuing a loan from the Department of Housing and Urban Development. Their Federal Housing Administration (FHA) loans are ensured by the FHA so the mortgage terms are better for borrowers.

Part of the loan requirements is that the buyer has no delinquent tax debt. This means that if you are ignoring your debt, you won’t get approved for an FHA mortgage, but borrowers in a repayment program can still qualify. They just have to show that they’ve made the minimum number of payments and meet any other requirements.

Will Back Taxes Prevent You From Getting a Home Loan?

Owing back taxes may prevent you from getting a loan, but not always.  If you are ignoring your back taxes, most traditional mortgage lenders won’t work with you. In contrast, if you’re in good standing with the IRS and making payments on your back taxes, mortgage lenders will be much more likely to work with you.

The lender will consider your monthly IRS payments when calculating your debt-to-income ratio. They’ll also want some reassurance that you’re not likely to wrack up more unpaid tax debt. 

Alternative lenders might work with you whether you’re in good standing with the IRS or not. But they might also offer less favorable deals and interest rates. 

Owner financing is another option in this situation. This setup is when you buy a home through the seller directly instead of getting a traditional mortgage from a bank. Sellers often agree to this if they want to close quickly, and buyers who don’t qualify for a loan from a bank can benefit too. However, it’s critical to be aware that while an ower-carry loan can be great in some situations, it can be predatory in others. Consult with an attorney or other trusted person before taking on one of these types of home loans.

Can You Buy a Home With Unfiled Tax Returns?

Unfiled returns can make it impossible to get a home loan. Lenders use your tax return to verify your income, especially if you’re self-employed or a business owner. Before applying for a mortgage, make sure to catch up on your unfiled returns. Then, make a plan to pay your tax debt. To be on the safe side, talk with a mortgage broker so that you get a sense of the best way to resolve your particular issue. 

That said, if you are not required to file a tax return, the lender may be more than willing to work with you. They’ll just accept your W2, 1099-R, or similar documents as proof of income. 

If I Get a New Home, Will My Tax Debt Put It at Risk?

It’s possible that your new property could be at risk if you purchase it while neglecting your tax debt. This is especially true if:

•  You’ve been completely ignoring the IRS 
• You’ve attempted to claim you don’t have the money to pay off your tax debts 
• You already own other properties

Here’s why. The IRS has the authority to issue tax levies and tax liens for unpaid taxes. A tax lien attaches to all of your current and future property. So, if you buy a home with cash, convince an alternative lender to work with you, or inherit a home, the IRS tax lien will attach to that property, and eventually, the IRS may move forward with seizing your new home. 

How a Tax Lien Could Impact Your Home Purchase

A tax lien is a public record that alerts everyone that the government has a legal right to your property. This can prevent you from getting a mortgage loan to buy a home. When the IRS has a lien in place, it will automatically attach to any new property you buy, and its lien will take priority over all liens that are established later.

By extension, most lenders will not be willing to give you a loan unless the IRS withdraws the lien or agrees to let its lien have less priority than the IRS. To put this in plain English, this just means that the IRS agrees to let the mortgage company have first dibs on any funds that are generated if you sell the home in the future. This is called lien subordination. 

Alternatively, to get the IRS to withdraw the lien, you will need to set up a payment plan that has terms that allow the IRS to withdraw the lien. Typically, you have to make at least three payments before the IRS will withdraw the lien. 

How Tax Levies Impact Home Purchases

A tax levy allows the IRS to officially seize your property in order to settle your tax debt, and if you’re facing a tax levy, you are generally not going to be able to buy a home. If you’ve been ignoring unpaid taxes, the IRS can seize the funds in your bank account (even if you’ve been saving them up to buy a home). They can garnish your wages, leaving you with significantly less income than you need to make a mortgage payment. A lender is not going to approve a mortgage application if you’re in this type of situation. 

Solving Tax Debt So You Can Buy a Home

When you are struggling with tax debt, it usually makes the most sense to get on good terms with the IRS before moving forward with your homeownership goals. Getting back into good standing with the IRS has many benefits, including opening up the possibility of better loan terms.

The best way to resolve your situation is to pay off your full tax debt in one lump sum payment. If that’s not an option for you, here are a few alternatives you can try:

Monthly Payments

The IRS offers several different monthly payment plans to help people get caught up on their back taxes, and many of them require the IRS to withdraw tax liens once you’ve made three monthly payments. However, before setting up payments, you’ll need to get current on all your past-due returns. 

Offer in Compromise

An offer in compromise is where you pay a big lump sum in exchange for a reduced tax bill, but in some cases, you can make payments for up to 24 months. Once you meet the terms of the offer, the IRS will remove tax liens against you.

Penalty Abatement

Getting penalties removed from your tax bill can save a lot of money and make it easier for you to set up payments. Contact the IRS about first-time penalty waivers and/or reasonable cause penalty abatement. 

FAQs: Back Taxes and Buying a New Home

If You Owe the IRS Can You Buy a House?

It depends. Some lenders will deny a loan due to your tax situation, but others may still be willing to work with you. Consider going the FHA loan route if you have tax debt but are paying it off under a payment plan. 

Does Owing the IRS Affect Buying a House?

Mortgage lenders will look at your complete financial situation, and that includes tax debt along with other forms of debt, compared to your income. So, even if you have a payment plan for your tax debt, the monthly payments could reduce your ability to get approved if you have a lot of tax debt.

How Do Lenders Know You Owe Taxes?

You must report all of your debts on your mortgage application. Failure to do so may constitute mortgage fraud. If the lender looks at your tax return, they will be able to see if you owed a tax liability when you filed, and they may ask to see proof that you paid the bill. Additionally, tax liens are public records so the lender will see them as the loan goes through the underwriting process.

Can I Get a Conventional Loan If I Owe Back Taxes?

To get a conventional mortgage loan, you usually need to have about 20% down. If you have this amount and you have established a payment plan for your back taxes, you may be able to get the loan. However, if you’re ignoring your back taxes or if the monthly payments would make it hard for you to get a mortgage, most conventional lenders will likely deny your application. 

Does an IRS Payment Plan Affect Your Mortgage?

Having a monthly payment plan with the IRS won’t always prevent you from getting a mortgage. However, potential lenders will take those monthly payments into account when determining how much to lend you. Your lenders will also want to ensure that you won’t be incurring any new tax debt. Lenders look closely at all of your current debts and finances before offering you a loan.

How Much Do I Have to Owe in Back Taxes Before the IRS Takes My House?

Under current tax codes, the IRS can only get court approval for a levy on your home when your tax debt is over $5,000, but home seizure is rare. The IRS only uses this as a last resort.

Can I File as Currently Non-Collectible With the IRS and Still Buy a Home?

When the IRS determines that you genuinely can’t afford to pay back your tax debt due to your financial circumstances, they may decide to label your account as “currently not collectible” status. This means that the IRS won’t continue to pursue collection actions against you, considering your financial situation. 

If you go to purchase a new home, then that won’t necessarily interrupt your CNC status. It could, however, prompt the IRS to start an investigation to ensure that your financial situation hasn’t changed. Additionally, most people who qualify for CNC status don’t qualify for mortgage loans. Generally, you can only get CNC status if you have very limited disposable income, which also means that you won’t be able to afford a mortgage payment. 

Will the IRS Reopen an Old Tax Debt Claim if I Buy a House?

Yes. It is possible that an old tax debt claim may get reopened if the IRS learns that you purchased a home. This is especially true if you’ve been filed under CNC status with the IRS or proved financial hardship in the past. 

If a case gets reopened, then that doesn’t mean that your property will immediately be at risk. The IRS may continue to allow you to be in good standing if they review your finances and still determine that you’re unable to pay back your debt.

Are You Ready to Solve Your Tax Problems?

The good news is that no tax problem is too big to tackle. Are you ready to solve your tax problems and get on with your homeownership goals? Then contact us at the W Tax Group to schedule a free consultation and learn more about how we can help you overcome your tax problems and make your homeownership dreams a reality!