Tax season can be a scary time for many people.
While we all know we have a tax obligation, life sometimes gets in the way, creating unfortunate situations when many people are unable to pay their federal taxes.
If this has happened to you, you may have used a convenient options known as the Federal Tax Installment Plan, sometimes called a “tax payment plan,” or a “tax repayment agreement.” No matter what it’s called, it’s a convenient way to pay your taxes in steady, regular installments instead of a lump sum, which many people can’t afford.
However, these installment plans can create issues when you look for a mortgage loan. Because they impact your finances for months or even years, lenders are weary of borrowers who owe money to the IRS, even if it’s structured into routine payments.
But if you need a mortgage, there are options.
Why Does a Repayment Plan Create Challenges for Borrowing?
Virtually no one goes into a mortgage application completely flawless. Most people have a missed payment, a short credit history, or a large debt load. Perhaps someone has changed jobs lately, or doesn’t have a large downpayment. Most people have at least something that puts a negative mark on their overall application, but these people are (for the most part) still able to secure the loan they need to purchase a home.
So why is federal tax debt different?
In many ways, it’s not. But in one important way, it is extremely different: the involvement of the IRS.
Like it or not, the IRS is an extremely powerful institution that has the resources, manpower, and legal right to do things that (again, like it or not) other money collectors simply can’t. If you owe the IRS money, it could lead to tax liens on your income or levies on your finances. These can come with little or no warning.
Lenders, of course, are well aware of the power of the IRS, and they do whatever they can to avoid lending to borrowers who are likely pressed by the weight of this government agency. Basically, they do not want to loan to people who could be subjected to the IRS’s collection efforts.
So if you owe tax money, you might think you will be unable to secure a mortgage until you have paid off the burden. As long as you have debt to the IRS, you might assume, you can’t take out a mortgage loan.
But if you use the Federal Tax Installment Plan, there is hope. By taking action, being proactive, and setting up the plan, you are showing lenders that you are facing the problem and trying to reach a solution. This can go a long way in the eyes of lenders, and could help secure the loan you need for a fantastic home.
How to Get a Mortgage When Using a Federal Tax Installment Plan
You don’t have to let your tax installment plan get in the way of your home purchase. In the past, this issue would certainly have created issues, but in January of 2018 Fannie Mae released their Selling Guide updates, which brought a seismic change for people with IRS obligations. As a whole, the update included minor details like condo litigation and second appraisals, but at the top was a section that immediately allowed lenders to write Fannie Mae-eligible loans to people with monthly payments to the federal government.
The rules make a few stipulations in order to use this borrowing option. First of all, there must be “no indication” that a federal tax lien has been filed against the potential borrower in the county in which the subject property is located. This can create complications, but if you work with your real estate agent and lending agent you can likely find a home that fits your needs in an area where you will be happy.
Also, the lender will need to obtain a few different documents, including a copy of the approved IRS installment agreement. This document will need to include the monthly payment amount, as well as the total amount that is owed to the IRS. You will also need to provide proof that the payments are currently being made. The most recent payment reminder from the IRS is a suitable document. This document will need to have the last payment amount along with the date of the payment, as well as the next payment amount and due date.
In order to use this options from Fannie Mae, you will need to have made at least one payment.
There are, as you may suspect, other options for borrowing. If you work with the right lender, you may be able to secure financing outside of the boundaries of Fannie Mae or other government institutions. Be sure to talk with your lender to learn more about various options that may be available, and don’t hesitate to talk with multiple agents if you feel your options are limited.
How Does the Tax Installment Plan Impact Your Application
So we have established that it is possible to secure a loan even when you have a federal tax installment plan. But the payment plan will, like any other debt obligation, impact your eligibility to borrow money.
In this case, the payments to the IRS are treated with the same approach as virtually any other debt obligation: they are simply rolled into your total debt-to-income ratio. This means if your payments are too high, especially in comparison to your income, they could disqualify you from a mortgage.
For example, let’s say you have $1,000 in typical debt, such as car and student-loan payments. You also have a $1,000 monthly payment to the IRS. In this case, you debt would be calculated at $2,000. This would be the basis for calculating your debt-to-income ratio.
As you can see, getting a mortgage loan when you have a tax installment plan with the IRS is possible. But you need to work with the right lender who can show you various options, including loans supported by Fannie Mae.
Helping Secure Your Loan, Even When You Own Money to the IRS
If you want to learn more about how to get a mortgage loan when using a Federal Tax Installment Plan, contact the team at San Diego Purchase Loans today!
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“Chad – Your team has been nothing short of amazing. Juliann has aggressively followed-up with escrow and gone out of her way to make sure things get done on schedule. Matt and I can’t express to you enough how much we’ve appreciated all of your counsel at the beginning of the process and her execution to see it through to close. As always, appreciate everything that you guys have done to see this through.”
I highly recommend Chad Baker. He does a phenomenal job and won’t trauma you or your clients. He has a whole team that works on the loans. And all the team members are great. He has a person that can translate for your clients that are Chinese. He is as good of a loan officer as you are an agent, and that is what you want when referring clients to a lender.