Does a Monthly IRS Payment Plan Amount Factor Into Debt-to-Income Ratio When Applying for a Home Loan?
Mortgage lenders consider several factors when evaluating a borrower’s financial situation and credit history, including their debt-to-income (DTI) ratio. DTI compares a borrower’s monthly income to debt payments.
For example, if someone has a monthly income of $3,000 and monthly debt payments of $2,000, their DTI of 67% would indicate they aren’t likely to be able to take on more debt, including a home loan. Many mortgage lenders want a maximum DTI around 43%.
IRS payment plan amounts are considered part of a borrower’s DTI ratio since the monthly tax payments are financial obligations just like car loan and credit card payments.
Depending on the amount of a monthly IRS payment and remaining tax debt, the payment plan could give someone a debt-to-income ratio that is too high to qualify for a home loan.
Will An IRS Payment Plan Lower Your Credit Score?
Being on an IRS payment plan will not necessarily impact your credit score if you do not miss any payments. Continuously making late payments or no payments could result in the IRS reporting a lack of consistent payments to credit bureaus.
Moreover, having a significant tax debt could indirectly affect your credit score. High debt levels relative to your income and credit limits will reduce your credit score.
Taxpayers using substantial portions of their available credit to stay current with an IRS payment plan could negatively impact their credit score.
In some cases, applying for an IRS payment plan could also trigger a credit inquiry that may have short-term ramifications on a credit score.
Can You Qualify for a Mortgage When You’re On An IRS Payment Plan and Have a Tax Lien?
Getting approved for a home mortgage loan while paying off IRS tax debt and having a tax lien is challenging but not impossible. Mortgage lenders will consider the following regarding potential borrowers on an IRS payment plan with tax liens.
Lenders assess your DTI ratio when evaluating whether you qualify for a mortgage and for how much. An IRS payment plan and a tax lien can increase your debt-to-income ratio.
As we discussed earlier, a high DTI ratio may make it more difficult to qualify for a mortgage since lenders prefer borrowers with lower debt levels relative to their income.
Tax liens can significantly hinder your ability to qualify for a mortgage. Tax liens are public records that appear on your credit report and can lower your credit score.
Lenders typically view tax liens as a financial responsibility that may make it less likely you remain current on mortgage payments.
Each mortgage lender has its eligibility criteria for applicants. Some lenders may be more flexible when considering borrowers with tax liens or IRS payment plans.
Researching lenders online may help you find one that accepts applications from individuals with tax liens and IRS payment plans.
What Type of Home Loan Programs Are More Favorable When You Have an IRS Payment Plan?
Government-backed home loans
Loans like Federal Housing Administration (FHA) loans are usually easier to get approved for when your credit score is fair and you owe outstanding debts.
You may qualify if monthly IRS payments are factored into your debt-to-income ratio, and you can demonstrate a history of on-time payments for your IRS payment plan.
Lenders do not want to see any late monthly IRS payments for anywhere from six consecutive months to a year or more.
Conventional mortgage loans
Loans like Fannie Mae/Freddie Mac have stricter approval requirements than FHA loans. However, some lenders may approve your loan request even though you are on an IRS payment plan if the balance is low and you have made monthly payments on time.
However, obtaining a home loan with decent credit and proof of on-time payments may not be feasible if the balance on your IRS tax debt exceeds several thousand dollars.
Keep in mind that regardless of the type of home loan, a sizeable down payment can always help support your mortgage application and reduce the amount you need to borrow.
If you can put more down while on an IRS payment plan, taking less of a loan can help offset the DTI hit from your monthly tax payment and keep your debt-to-income ratio within a lender’s limits.
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