There are a lot of factors that lenders consider before issuing a loan. You’ll find debt-to-income ratios, credit scores, loan-to-value factors, and much more.
One of the factors that can be lost in the shuffle is taxes. If a potential borrower owes money to the state or federal government, it can make getting a loan difficult. This is especially true when the borrower is looking for an FHA loan.
If you owe money in back taxes, you can still get an FHA loan, but you need to make specific steps to address the issue.
FHA Loans and Tax Liens
Understanding Tax Liens
A tax lien is essentially the government claiming ownership rights to your property if taxes go unpaid. If a business or individual taxpayer fails to make payments on their federal or state taxes, the government has the right to claim an ownership stake, which can affect many different aspects of buying and selling a home.
A tax lien, however, does not mean the government can simply come in and seize your home. It simply ensures that they have first right to your property (specifically, your money) over other parties.
A tax lien will always follow a detailed legal process. The government must asses the amount owed and send a tax bill to the taxpayer’s last known address. After the bill is sent, the taxpayer will have a certain time period to pay the taxes. If he or she does not pay the tax bill on time, the tax lien can then be issued.
Even then, the government has to issue a formal notice. This notice will not only be sent to the taxpayer, but also any known creditors. The notice serves to inform the taxpayer and creditors that the government has a legal claim to the taxpayer’s property.
In most situations, first priority for money owed goes to whichever loan was made first. So if your car loan was issued five years ago and your credit debt is two years old, the car loan would have first priority. Taxes, however, automatically jump to the front of the line.
So if you have delinquent payments to mortgage lenders and car loan lenders, the government has the right to go to the front, meaning other lenders simply have to wait at the back of the line until the taxes are paid. Liens of any type can create an issue for borrowers. For this reason, if you have any unpaid taxes, lenders are more hesitant to issue loans.
The FHA and Tax Liens
If you apply for an FHA-backed loan, the loan officer will verify a wide range of information. This information can include your debt-to-income ratio, your employment record, and your credit score. The officer is also obligated to check your tax status.
The loan officer is required to research public records, and if he or she finds that you are delinquent on any federal debt or have a tax lien placed against your home, you are not qualify for a loan according to FHA’s eligibility requirements.
Subordination Agreements
To fully understand this topic, you need to understand the concept of a subordination agreement. This is a legal document that essentially makes the claim of one creditor secondary to the claim of another. In most cases, these types of documents are used when a homeowner has two or more mortgages and the first one will be refinanced.
Let’s say you have a first mortgage with 4.5% interest and a second mortgage with 3% interest. You want to take advantage of better interest rates, so you decide to refinance the first mortgage. However, this would essentially eliminate the first and create a third. The second mortgage would be the oldest and would get first priority. In this case, the lender offering the refinancing would require the holder of the second mortgage to sign a subordination agreement and allow the refinanced mortgage to get first priority.
How to Get an FHA Loan Despite a Tax Lien
So if you owe unpaid taxes to the federal government, does that mean an FHA loan is completely off the table? Not entirely. While the best approach is to pay the back taxes as soon as possible, it’s actually not necessary. To get an FHA loan, you don’t have to pay the taxes; you do, however, need to address the situation.
If you don’t have the money to pay your taxes, you can enter into an agreement with the government for gradual repayment. Once you have entered into the agreement and made payments for at least three months, you should become eligible.
However, you can’t prepay three months worth of payments to reach the three-month milestone early. Let’s say you enter into an agreement where you will pay $300 a month towards your taxes. In the first month, you can’t pay $900 and become eligible, the payments must be sustained over three months.
To be eligible, the lien holder must also subordinate the tax-lien to the FHA-backed mortgage. Essentially, the federal government would have to sign a subordination agreement. If any financial burdens occur in the future, the FHA mortgage will have priority to the borrower’s property over the IRS. If the federal government will not agree to be secondary, an FHA loan will not be available.
The lender must also make a few other adjustments. They must include the payment amount that is in the agreement into their calculation of the borrower’s debt-to-income ratio. So if you are in an agreement to repay $300 a month towards your taxes, this amount will be calculated in your DTI. The result is that your DTI, which is calculated as a percentage, will rise. In most cases, a high DTI can be a barrier to strong loan terms for the borrower.
The lender will also have to include documentation from the IRS that demonstrates a repayment plan has been made. To make you eligible for an FHA loan, this document must also verify three months of payments.
Expert Advice on Home Ownership and Mortgages
If you owe money to the IRS but need to purchase home or refinance your current mortgage, contact San Diego Purchase Loans today.
We’ll make sure you have the right information to make a confident home buying decision. With a common-sense approach to lending, we know how to increase your chances of approval, no matter what your tax situation.
