Buying a home is exciting. It is also stressful, especially when you know there is something in your finances that could complicate the process. For many buyers, that something is back taxes owed to the IRS.
Here is the part most people do not realize: owing the IRS does not automatically disqualify you from getting a mortgage. Plenty of buyers close on homes every year while carrying tax debt. The key is preparation.
Lenders want to see that you are taking responsibility, staying compliant, and moving in the right direction. When there is a clear plan in place, tax debt becomes a manageable hurdle, not a deal breaker.
This guide walks you through how IRS debt affects mortgage approval, what lenders actually look for, and what steps you can take now to put yourself in the strongest possible position. With the right strategy and the right tax resolution support, homeownership is still very much within reach. To get help dealing with IRS tax debt today, contact us at East Coast Tax Consulting Group.
Key Takeaways
- You may be able to qualify for a mortgage if you owe the IRS, but unresolved tax issues can delay or prevent approval.
- Unfiled tax returns can make it impossible for lenders to verify your income, and you typically need to file before getting approved.
- If you owe taxes, you may be able to get a mortgage, but generally only if you’re on an IRS payment plan.
- You may need to get tax liens withdrawn or subordinated to get your loan approved.
- Working with an experienced tax resolution team can improve your approval odds and help speed up the process.
How Tax Problems Affect Mortgage Approval
When you apply for a mortgage, lenders are trying to answer one big question: Can this person afford another major monthly payment?
That is why tax debt gets their attention.
Owing the IRS is not uncommon. People end up with back taxes for many different reasons. Life happens. Lenders understand that. What they care about is whether the situation is under control or not. Where things start to get tricky is when tax issues interfere with income verification or indicate ongoing financial strain.
Here are the most significant ways tax debt affects you when you apply for a mortgage:
- Unfiled tax returns are one of the fastest ways to stall a mortgage. If your returns are missing, lenders cannot confirm your income, and without that information, they cannot approve a loan. It is usually a hard stop until you file your outstanding returns.
- IRS tax liens can also complicate the mortgage application process. From a lender’s point of view, a tax lien creates competition. If you ever defaulted on your mortgage, the IRS would get paid before the mortgage company. Lenders generally will not approve a loan unless you get the tax lien subordinated, withdrawn, or released.
- Unpaid taxes can raise red flags, even if the IRS hasn’t filed a tax lien. If there is no payment plan in place, tax debt can look like a growing problem instead of a temporary setback.
What lenders want to see is stability. Filed returns. Proof that you are working with the IRS and keeping up with your obligations. When tax debt is organized and managed, it becomes just one part of your financial story, not the thing that defines it.
What to Expect If You Apply for a Mortgage When You Owe Taxes
Tax debt affects mortgage applications in a range of ways. It depends on whether you have unfiled returns, how much you owe, what type of payments you’re making, if there’s a lien filed, and the rest of your financial application. Here’s what to expect in different situations.
Income verification challenges due to unfiled returns
Mortgage lenders often use tax returns to verify your income, especially if you’re self-employed, and many lenders will not work with borrowers who have unfiled returns. A report from the National Association of Realtors indicates that 12% of mortgage applicants get denied for unfiled returns.
You may be able to work with a non-qualified (N-Q) lender who accepts bank statements, 1099s, or other documents as proof of income, but the rates tend to be higher.
Denials due to unresolved tax debt and tax liens
Unresolved tax debt and tax liens are two major red flags for lenders.
- Unresolved debt indicates you don’t pay your bills, painting you as a high-risk borrower.
- Tax liens attach to all future property, disrupting the lender’s ability to use your new home as collateral.
Most lenders will not approve you for a mortgage if you’re dealing with either of these issues, but if you set up payments and take care of the lien, you could get a mortgage.
IRS payment plans and creditworthiness
If you owe taxes but you’re making payments, you may be able to get approved for a home loan, but the lender will consider:
- Monthly debt-to-income (DTI) ratio: Your DTI ratio is the amount of your monthly debt payments (car loans, credit cards, tax debt repayments, etc.) compared to your monthly income. Lenders typically want to see a range between 36 and 50%, including your mortgage payments.
- Back-end DTI ratio: The back-end DTI is the total amount you owe on all debts compared to your annual income. The target range varies, but of course, lenders include all of your tax debt when looking at this metric.
- Payment history: Lenders want to see timely, consistent payments on your tax debt. Generally, you can’t get approved unless you’ve made at least three monthly payments, but some lenders may require even more.
- Compliance: If you’ve gotten behind once, there’s a risk you’ll get behind again. Lenders may want to verify that you’re compliant with current tax obligations, such as quarterly estimated payments, and that you have safeguards in place to stay compliant in the future.
- Tax liens: Sometimes, the IRS files tax liens, even if you’re making payments. It depends on how much you owe and whether you set up payments before the IRS filed a tax lien. If there’s a lien, you’ll need to take extra steps to resolve it before you get a mortgage.
Lenders will take your tax debt payments into account when reviewing your mortgage application, but outcomes vary. Depending on the numbers, the lender may deny your application, approve you for a loan with a reduced value, require you to resolve the tax lien before approval, offer you a loan with a higher interest rate, or approve you with good terms.
Now you know what to expect when applying for a mortgage while dealing with tax problems, but what can you do to improve your odds?
How Tax Debt Affects Different Types of Home Loans
The rules vary for different types of mortgages. Here’s what to expect for various types of home loans.
| What Type of Mortgage Can You Get If You Owe Taxes? | |||
|---|---|---|---|
| Type of Mortgage Loan | Can You Qualify? | Requirements | Are Liens Allowed? |
| FHA loan | Yes | IRS installment agreement, at least three monthly payments | Typically no. |
| VA loan | Yes | IRS installment agreement, made at least three to 12 monthly payments | It depends. May face additional requirements if tax lien is worth more than 10% of loan value |
| Conventional mortgage | Yes | IRS installment agreement, at least one to three monthly payments | Generally no, unless the IRS agrees to subordination |
| Alternative lenders | Varies | Varies, but alternative loans often have high interest rates, poor terms, and/or balloon payments | Possibly |
Tax Resolution Strategies to Help You Buy a Home
If you owe the IRS and want to buy a home, the most important thing is to show lenders that your tax situation is under control. They are not expecting perfection. They are looking for responsibility, consistency, and a clear plan.
The right strategy depends on the type of problem you’re facing, but here are tips to start moving in the right direction.
- File any missing tax returns. This is essential for income verification. Even if you can’t pay in full, you must file before you can set up payments.
- Set up monthly payments if you owe a balance. An IRS installment agreement shows lenders that you are actively resolving the debt and making regular payments.
- Modify payment plans if needed: If your monthly payments are making your debt-to-income ratio too high, you may want to negotiate a lower monthly payment with the IRS. If you owe under $50,000, the IRS will generally let you push payments to the collection statute expiration date (CSED), which is approximately 10 years after assessment, and that can potentially reduce your monthly payment.
- Apply for a settlement if applicable. If you can’t afford to pay in full, you may qualify to settle for less through an offer in compromise. Typically, you must get the settlement approved before a lender will approve your mortgage application. Strongly consider working with a tax professional as the IRS rejects most offer in compromise requests.
- Get help with tax liens. If a federal tax lien has already been filed, you may need to request a lien withdrawal or subordination before applying for a loan. This process takes time and should be started early. Working with a tax professional can help keep everything moving and prevent costly delays.
Tax problems can be very overwhelming, but you don’t have to face them on your own. Reach out to a tax resolution specialist for help. They can guide you toward the best resolution options for your unique situation.
How Tax Liens Affect Home Purchases
IRS tax liens attach to all of your current and future assets. That means if you buy a home, the lien attaches to your new home. That’s a problem for mortgage lenders because they use your home as collateral, and a tax lien can disrupt their ability to do that.
Here’s why. When a bank lends you money to buy a home, they attach a lien to your home based on the value of the mortgage. If you default on the loan, the lender has the right to foreclose on the home and auction it off to cover the lien. If there’s any money left over, it goes towards any other liens attached to the home, and then the homeowner gets any surplus.
However, it only works that way if the mortgage lender’s lien has top priority. If another lien has priority, that lienholder is entitled to any proceeds from the sale of the home before anyone else. For example, say that someone has a home that’s fully paid off, but they don’t pay their property taxes or their federal taxes. So both the county and the IRS file a tax lien against them. The lien that’s filed first takes priority.
If they sell the home, the proceeds will go to the first lienholder, then the second one, and so forth. A mortgage lender is not going to get in line behind other lienholders because that means there’s no way for them to collect their money if you don’t pay. But luckily, there are options.
How to Deal With Tax Liens When Applying for a Mortgage
Tax liens complicate mortgage approvals, but they don’t make it impossible to get a home. There are a few different ways to deal with IRS tax liens when applying for a mortgage.
Satisfy the tax debt so the IRS releases the lien
The IRS will release the tax lien if you pay the debt in full or get a settlement. A release means you don’t owe anything on the lien. It won’t attach to your new home, but it may still exist in the public record.
Get the lien withdrawn
The IRS will typically withdraw the lien from the public record 30 days after you pay in full, but the agency may also agree to withdraw the lien if you set up a qualifying payment plan. Typically, you must meet these criteria:
- Owe $25,000 or less.
- Set up payments to pay off the tax debt within 60 months or by the CSED if sooner.
- Agree to pay through direct debit.
- Make three consecutive monthly payments on time
Ask the IRS to subordinate its lien
Lien subordination is when the IRS agrees to let its lien fall behind another lien. In this case, the IRS agrees to let your mortgage lender’s lien take priority ahead of the IRS’s lien. If there’s a tax lien in the public record, this is typically the only way to get approved for a mortgage.
Tax liens don’t just make it hard to get a mortgage. They also make it harder to sell your current home. If you have a lot of equity in your home, the IRS will generally require you to pay off the tax lien when you sell the home. If there’s not enough equity to cover the tax lien, the IRS may discharge (remove) the lien so you can complete the sale.
FAQs About Buying a Home When You Owe Taxes
Buying a home is always complicated, but it gets even harder when you owe taxes. Learn more with these questions and answers.
Does tax debt appear on my credit report?
No, tax debt does not appear on your credit report, and it does not affect your credit score. However, it does affect your creditworthiness. Mortgage lenders always take tax debt into account when reviewing your application.
How do mortgage lenders know I owe tax debt?
Mortgage underwriters do a public records search, and during that process, they will discover all tax liens in your name. The tax debt may not be taken into account during the pre-approval process, but it will eventually affect your loan.
Can I buy a house in a different county if I have a tax lien?
Generally, no. Tax liens are often filed in county offices, but mortgage underwriters will typically find all of your tax liens, regardless of where they’re filed. Simply buying a house in a different county will not improve your odds of getting approved for a mortgage.
What if I buy a home in cash?
If you buy a home in cash, the federal tax lien will attach to your new home. Also, there’s always a risk that the IRS may levy your bank account to collect the tax debt involuntarily, before you’re able to use the cash to buy the home. Consider resolving your tax debt before you buy a new home.
Contact Us for Tax Debt Help
East Coast Tax Consulting Group helps taxpayers get compliant, resolve IRS balances, and build a clear financial foundation before applying for a mortgage. We can also help you deal with tax liens if you secure a mortgage approval contingent on tax lien subordination, withdrawal, or release.
If buying a home is on your horizon, start by getting your tax situation on track today. We can help you move forward with confidence when the time is right. To learn more, contact us today.