If you have a tax lien from the IRS or a court judgement from an individual, it can make getting a mortgage more difficult. However, with the right approach, you can clean the record and increase your chances of mortgage approval.
How Lenders Handle Tax Liens and Judgements
The rules have been slightly changed regarding how lending agencies deal with tax liens and judgements. In most cases (but certainly not all), you will be required to pay off tax liens, judgements, and other types of court-ordered debt in order to move forward with a loan. However, the way that lenders review these debts, and where they find the judgements and liens, has changed.
According to a 2017 letter from Fannie Mae, if the information is available on your credit report, the lender will continue to use the information as part of the assessment. In most cases, this means they will have to enter the information into Desktop Underwriter, the automated underwriting program. Judgements and liens that have not been paid and are in the public record will be used when entering information into Desktop Underwriter. If the debts have been paid, then you will need to provide verification so they are not included on your mortgage approval process.
Documentation Matters More Than Ever
The real change, as far as borrowers are concerned, is that lenders now have to rely on careful documentation and review of documents. This means that you will need to provide a wide range of documents, including payment programs, lien satisfactions, and other important information that can help you get approved. Documents that may be needed include pay stubs with deductions (if having wages garnished to satisfy debt), bank statements with debt payments, or evidence of tax lien payment program.
How to Finance a Home When You Have Tax Liens and Court Judgements
By taking a proactive approach to the financial obligation, you can still get the affordable mortgage you deserve.
Note: San Diego Purchase Loans does NOT provide legal advice regarding tax liens or court judgements. All legal issues should be discussed with a qualified attorney.
Pay the Debt
This is the most obvious option, but it’s not necessarily the easiest. Many people struggle to find the finances to pay the debts, but if you have the cash on hand (or any assets you can sell), it may be wise to get rid of the debt so you can purchase the home you desire.
Look to FHA, USDA, or VA Financing
If you have been making regular payments towards your financial obligations, you may be able to secure a loan that is backed by the FHA, USDA, or VA. You’ll have to have been making these payments for the past three months, and the IRS must be willing to subordinate their lien to the new mortgage. (Essentially, if you can only pay one back, the mortgage must come first.) You’ll also need to bring a copy of the repayment agreement to the lender, and this figure will be included in your debt-to-income ratio.
Contact the IRS for Lien Adjustments
The IRS may not have the best reputation among the American public, but they do make an effort to help taxpayers by providing assistance and flexibility with the lien process. First of all, they have increased the dollar amount that requires a lien, so if your lien is right on the edge of this amount, you may actually be able to have it removed. Essentially, the IRS adjusted the amount to account for inflation. You could also contact them to take advantage of the Offer in Compromise (OIC) program. This program, which doubles the maximum allowed tax liability limit, has been expanded to include more taxpayers. If you haven’t looked into this program lately, you may be eligible. You’ll still owe money to the IRS, but these programs may remove the official lien against your property, making a mortgage loan more likely.
Use a Direct Deposit Installment Agreement
Another important program implemented by the IRS is the Direct Deposit Installment Agreement (DDIA). This program allows the IRS to withdraw tax liens for taxpayers who owe smaller amounts (around $25,000 or less) when they set up a direct deposit repayment structure. Usually after three payments are made, the IRS will consider withdrawing the lien against your property. In theory, you could start the program, convert your existing installments into a direct deposit, and within three payments have the chance of dropping the lien.
Contact the Office of Taxpayer Advocate
The federal government has set up the Office of the Taxpayer Advocate, which is designed to assist taxpayers who are having trouble navigating the complexities and delays of the IRS. This is an important office that helps protect taxpayers, and it is completely independent of the IRS. Essentially, this office can help you untangle the bureaucratic knots that cause major delays with tax liens. This is a beneficial program, as you can get one person helping you, as opposed to dealing with multiple people from the IRS.
Settle Any Issues Out of Court if Possible
If you have a financial issue that has not yet gone to court, it may be in your best interest to pursue a settlement outside of the courtroom. If possible, try to work out a payment plan that helps you pay off the debt before it becomes an official judgement. Most people do not want to deal with the hassles and legal costs of civil court, so they are likely to work with you to settle the agreement. If your judgement is not yet official, settling out of court can also keep your record clean, which could help your mortgage chances.
Let a Dedicated Team Help with Your Mortgage Application
No matter what your financial situation, let the team at San Diego Purchase Loans help. Even if you have a tax lien or court judgement, we’ll take a common-sense approach to increase your chances of approval.
