Because of the effects on your debt-to-income ratio, it can be tough to get a mortgage loan when you owe money to the IRS can be difficult.
When lenders look at your profile, they will consider many different factors, including the loan amount compared to the property value, your total annual income, and the amount of money you owe to various lenders.
The DTI is one of the most important figures for lenders, as it gives them a fairly reliable picture (statistically speaking) of your overall risk as a borrower. In most cases, lenders want to see a DTI of 45% or less. (Meaning the amount you owe monthly is only 45% of your total income.)
If you owe money to the IRS, it can drive up your DTI and reduce your chances of approval. But with new guidelines from some of the most important institutions in lending, especially Fannie Mae, you can secure a mortgage even when you own money to the IRS.
Whether you have a current payment plan or an IRS lien against your property, there are ways to get a mortgage loan no matter how much you owe in taxes.
How to Secure a Mortgage Loan When You Owe Money to the IRS
New Rules from Fannie Mae Increase Chances of Approval
In the first month of 2018, Fannie Mae announced that borrowers who have repayment agreements can qualify for a loan that conforms to the organization’s rules. Fannie Mae, which is a government-sponsored mortgage buyer, is an important part of the American real estate market, and by allowing people with tax obligations to receive approval, they have opened opportunities for people all across the country.
According to Fannie Mae’s guidelines for monthly debt obligations, if you have entered into an installment agreement with the IRS that repays a portion of your tax debt every month, lenders can include that debt payment into your total monthly debt load. Previously many borrowers would have to pay off the tax obligation in full before a mortgage loan could be approved.
As long as the added tax payments do not push your DTI to 46% or higher, you should be eligible for loan qualification, assuming all other factors meet Fannie Mae’s guidelines.
Additional Fannie Mae Requirements
The new rules create tremendous opportunities for many borrowers, but Fannie Mae still has some requirements that you need to meet. For example, you must disclose the repayment plan and the monthly payment amount on your loan application; this information will be used by the lender to analyze your borrowing potential.
One of the requirements is that you can’t have a Notice of Federal Tax lien filed against you in the county where the property you wish to purchase is located. This puts the property that you will be borrowing against at risk because the IRS could seize it. (Which is rare, put still possible.)
Fannie Mae will also require that you provide a few different documents to the lender. For example, you will need to bring documents that verify the approved repayment plan from the IRS, which should include the monthly amount as well as the repayment total. You’ll also need to bring evidence that you are currently making payments towards the tax obligation. Fannie Mae will only require one payment towards the tax lien to qualify. This is different from other organizations; the FHA, for example, requires three months before you can apply for a loan.
Getting a Loan When You are Making Payments to the IRS
Every organization will have different guidelines, but there are a few strategies that you can use to improve your chances of approval when you owe money to the IRS. First of all, you should avoid having an official lien filed against your property by the IRS. A lien is basically a legal statement that says someone (in this case, the IRS) has a legal right to seize your property. You can owe money to the IRS and not have a lien, but once a lien is filed, it can harm your chances approval, in large part because it harms your credit. Taking action before the IRS files a lien is an important first step, and joining a repayment plan can help in this regard.
If keeping your DTI low is most important to you, then you may want to consider keeping the monthly payment on your repayment plan as low as possible. This will keep your monthly totals down, which could keep you below the 45% mark. (Because DTI is calculated by monthly payments, not total amounts owed.) However, when you agree to lower monthly totals, you will be paying off the tax obligation for a longer period; it may be beneficial to eliminate the tax obligation as quickly as possible, depending on your situation.
What If You Already Have a Tax Lien?
But what if you have a tax lien but don’t have the funds to pay the amount owed? Are you stuck without a mortgage? Not necessarily.
If you have a tax lien already filed and can’t pay off the total, an FHA loan may be a good option. If you have made three months of payments, you may be able to get a loan through the FHA, but you will need the IRS to agree to “subordinate” their lien.
When a debt is subordinate, it means it is second in line for recovering assets. Let’s say you can’t make your payments on both the mortgage and the tax lien; to get paid, the lender and the IRS may try to seize your house. However, if the tax lien is subordinate, the lender will be first in line to recover their money from the sale of your home. The IRS, on the other hand, will be second. Getting the IRS to take a backseat can be tough, but you can start by filling out an application to subordinate the federal tax lien.
Don’t Let a Tax Lien Keep Your From Homeownership
If you have more questions about getting a mortgage loan when you owe money to the IRS, let San Diego Purchase Loans provide the advice and assistance you need.
