Tax Blog

Can You Buy a House If You Owe Taxes?

Can I Get a Mortgage If I Owe Back Taxes?: The Surprising Answer

When planning to buy a house, potential homeowners often focus on factors like saving for a down payment, securing a mortgage, and finding the perfect property. However, one commonly overlooked aspect is the impact of outstanding tax debts on the home buying process. The question that arises is: Can you buy a house if you owe taxes? The short answer is yes, but there are some hurdles you’ll need to overcome. In this article, we’ll explore the impact of tax debts on your home buying journey and provide practical advice for navigating this complex situation.

The Impact of Tax Debts on Your Credit Score

How Unpaid Taxes Affect Your Credit Score

Your credit score plays a critical role in determining your eligibility for a mortgage. Lenders use it to assess your creditworthiness, which influences the terms and interest rates of your loan. Unpaid taxes can negatively impact your credit score, as the IRS may file a tax lien against you. A tax lien is a public record that notifies creditors of the government’s legal claim on your property due to unpaid taxes. Having a tax lien on your credit report can severely lower your score, making it more difficult to secure a mortgage.

Removing a Tax Lien from Your Credit Report

If you have a tax lien on your credit report, it’s essential to take action to have it removed. Paying off your tax debt in full is the most straightforward way to achieve this. Once you’ve settled your debt, you can request that the IRS withdraw the lien. Alternatively, you can enter into an installment agreement or apply for an Offer in Compromise (OIC) if you’re unable to pay the full amount. After satisfying the terms of either arrangement, the IRS will release the lien, which can help improve your credit score.

Financing a Home Purchase with Outstanding Tax Debts

Traditional Mortgage Lenders and Tax Debts

Obtaining a mortgage from a traditional lender while owing taxes can be challenging. Most conventional lenders require borrowers to have a clean credit history, including no outstanding tax debts. If you have a tax lien on your credit report, you may be considered a high-risk borrower, leading to higher interest rates or outright denial of your mortgage application.

Get Alternative Financing Options Instead of a Conventional Loan

If you’re struggling to secure a mortgage from a traditional lender due to tax debts, alternative financing options may be worth considering. These include:

FHA Loans:

The Federal Housing Administration (FHA) offers loans with more lenient credit requirements than conventional mortgages. While you can’t have an outstanding tax lien when applying for an FHA loan, you may be eligible if you’ve entered into an approved repayment plan with the IRS and made timely payments for at least three months.

Portfolio Loans:

Some banks and credit unions offer portfolio loans, which are held in their portfolios rather than being sold on the secondary market. These lenders may have more flexible underwriting standards and be willing to consider borrowers with tax debts, provided they can demonstrate a plan to resolve them.

Seller Financing:

In some cases, the seller of a property may be willing to finance the purchase, acting as the lender. This can be an attractive option if you’re unable to secure a mortgage due to tax debts, as the seller may have more flexible requirements.

Resolving Your Back Tax Debts Before Buying a Home

Create a Plan to Pay Off Your Tax Debts/Make Payments to the IRS

Before pursuing a home purchase, it’s essential to create a plan to address your outstanding tax debts. Some options to consider include:

Evaluate the best option for your financial situation and create a feasible repayment plan. Demonstrating a solid plan to resolve your tax debts can improve your chances of securing a mortgage.

Consult a Tax Professional, Especially If You Haven’t Filed

Dealing with tax debts can be complex, and it’s crucial to have a knowledgeable professional guide you through the process. Tax attorneys or enrolled agents can help you understand your options, negotiate with the IRS on your behalf, and ensure you’re taking the right steps to resolve your tax debts.

Improve Your Financial Standing

In addition to addressing your tax debts, take proactive steps to improve your overall financial standing. Focus on reducing your debt-to-income ratio, maintaining a low credit utilization rate, and avoiding new debts. These measures can help improve your credit score and make you a more attractive candidate for a mortgage.

Buying a House with Tax Debts is Still Possible

The journey to homeownership can be challenging when you owe taxes, but it’s not impossible. By understanding the impact of tax debts on your credit score and mortgage eligibility, exploring alternative financing options, and working diligently to resolve your tax debts, you can still achieve your dream of owning a home.

If you’re struggling with tax debts and considering buying a house, it’s essential to consult with a professional who can help you navigate this complex situation. The Tax Defenders offer a free attorney consultation to discuss your tax debts and home buying options. Call (312) 345-5440 or visit their website at to learn more and take the first step towards resolving your tax issues and securing your dream home.

Does IRS forgive tax debt after 10 years?

Yes, the IRS generally forgives tax debt after 10 years, as it has a limited time to collect outstanding taxes, called the Collection Statute Expiration Date (CSED). The CSED is typically 10 years from the date the tax was assessed. However, certain actions or events can extend the 10-year period, such as filing for bankruptcy, submitting an Offer in Compromise, or entering into an installment agreement.

Once the 10-year period has passed, the IRS may no longer pursue collection actions. However, you should consult a tax professional to understand your specific situation and confirm if your tax debt will be forgiven after 10 years.

How do lenders know you owe taxes?

Lenders can find out if you owe taxes through a few different methods:

  1. Credit Report: If you have outstanding tax debts and the IRS has filed a tax lien against you, this information will appear on your credit report as a public record. Lenders review your credit report as part of their evaluation process when considering your loan application. A tax lien on your credit report signals to the lender that you have unresolved tax debts, which can impact your chances of securing a loan.
  2. Tax Transcripts: When applying for a mortgage, lenders often request tax transcripts directly from the IRS to verify your income and tax filing history. These transcripts may reveal any discrepancies or outstanding taxes. 
  3. IRS Form 4506-T: Some lenders require borrowers to submit IRS Form 4506-T as part of the loan application process. This form grants the lender permission to access your tax records directly from the IRS, allowing them to discover any outstanding tax debts.
  4. Borrower Disclosure: During the loan application process, lenders typically ask borrowers to disclose any outstanding debts, including tax debts. Failing to disclose this information can lead to the denial of your loan application or even legal consequences.

In general, being transparent about your tax debts is essential, as lenders value honesty and accurate financial information. Addressing your tax debts and working with a tax professional to resolve them can improve your chances of securing a loan.

Does owing or not paying back taxes affect your credit score?

Owing taxes in and of itself does not directly affect your credit score. However, if you do not address your tax debts and the situation escalates, it can lead to negative consequences for your credit score. Here are two ways that unpaid taxes can impact your credit:

  1. Tax Liens: If you fail to pay your taxes, the IRS may file a tax lien against you. A tax lien is a public record indicating the government’s legal claim on your property due to unpaid taxes, including the amount Tax liens and the amount of tax debt used to appear on credit reports and had a significant negative impact on credit scores. However, as of 2018, the three major credit bureaus (Experian, TransUnion, and Equifax) no longer include tax liens on credit reports. Nevertheless, tax liens are still public records and may be discovered by lenders through other means, affecting your ability to secure loans.
  2. Collection Agencies: The IRS may assign your tax debt to a private collection agency if you don’t address your tax liability. If this occurs, the collection agency’s actions can appear on your credit report, which will negatively impact your credit score. Collection accounts can remain on your credit report for up to seven years.

While owing taxes may not directly affect your credit score, it is crucial to resolve your tax debts promptly. Unresolved tax debts can lead to various financial and legal issues, including difficulties in securing loans, wage garnishments, and property seizures.

Can you get an FHA loan if you owe back taxes?

You may be able to get an FHA loan if you owe back taxes, but certain conditions must be met. The Federal Housing Administration (FHA) has more lenient credit requirements than conventional mortgages, but they do have specific guidelines when it comes to borrowers with tax debts.

To qualify for an FHA loan while owing back taxes, you must:

  1. Have a satisfactory repayment plan in place with the IRS: The FHA requires that you’ve entered into an approved repayment plan with the IRS, and you’ve made on-time payments under the plan for at least three months. You’ll need to provide documentation, such as an official agreement from the IRS, to prove that you have a repayment plan in place.
  2. Demonstrate financial responsibility: The FHA wants to ensure that borrowers can manage their financial obligations. You’ll need to show a history of on-time payments, including your repayment plan with the IRS, as well as other debts and obligations.
  3. Meet all other FHA loan requirements: Besides addressing your tax debts, you must also meet other FHA loan requirements, such as having a minimum credit score (typically 580 for a 3.5% down payment or 500 for a 10% down payment), a stable employment history, and a debt-to-income ratio within FHA guidelines.

Consult with a mortgage professional familiar with FHA loans to determine your eligibility and guide you through the application process. Additionally, working with a tax professional to resolve your tax debts can improve your chances of securing an FHA loan.

What is considered delinquent federal tax debt?

Delinquent federal tax debt refers to any unpaid taxes owed to the Internal Revenue Service (IRS) by an individual or business that has not been addressed or resolved within the specified time frame. This can include income taxes, payroll taxes, and other types of taxes that have become past due.

A tax debt is considered delinquent when:

  1. The tax filing deadline has passed, and the taxpayer has not filed a return or requested an extension.
  2. The taxpayer has filed a return but has not paid the taxes owed in full by the payment deadline.
  3. The taxpayer has an outstanding balance from a previous tax year that has not been resolved.

Delinquent federal tax debt can lead to various consequences, including penalties, interest charges, liens, levies, garnishments, and even criminal charges in extreme cases. It is essential to address any delinquent tax debt as soon as possible to avoid these consequences and maintain good financial standing. Options for resolving delinquent tax debt include setting up a payment plan with the IRS, negotiating an Offer in Compromise, or seeking professional assistance from a qualified tax attorney.