Individuals who are trying to purchase a home will usually have questions about what they need to do to qualify for a mortgage. For some, worrying about how they will buy a new home when they owe federal taxes is a primary concern. The good news is that it’s often possible to qualify for a mortgage even if you have an outstanding federal tax debt.
How you handle your tax debt situation when applying for a home loan depends on the type of mortgage. Fannie Mae guidelines are a bit different from Federal Housing Administration (FHA) guidelines when determining how individuals who have federal tax debt can obtain a mortgage. It’s best to know what type of loan you want when reviewing your tax debt situation.
Fannie Mae Mortgages
You can’t have a federal tax lien against you if you’re applying for a Fannie Mae mortgage. If you have one, you’ll have to pay the entire tax debt and have the lien released before you’re able to get the mortgage.
If you don’t have a federal tax lien but have a federal tax liability, you can enter into an IRS installment agreement to satisfy the requirements to qualify for a Fannie Mae mortgage. You must make one payment on the installment agreement before you close on the house, but you can apply for the mortgage as soon as you get the IRS payment plan approved.
Federal Housing Administration (FHA) Mortgages
An FHA mortgage is possible if you have a federal tax lien, but the IRS will have to issue a Subordination Agreement that allows the FHA to collect on its loan before the IRS collects on its lien.
You’ll also need to enter into an installment agreement with the IRS to pay off your tax debt. For an FHA mortgage, you must make three consecutive IRS installment payments on time before you apply for the loan. Also, you can’t prepay the three in order to apply for the home loan earlier.
For Both Home Fannie Me Loans and FHA Loans
In both cases, the lender must count the IRS installment payments as liabilities. The installment agreement is also factored into your debt-to-income ratio. Because of these factors, there’s a chance that the tax debt will have a negative impact on your ability to receive favorable mortgage terms.
If you’re already on an IRS payment plan, you’ll need to get a copy of the payment history for the installment agreement. The lender will need to see that you’re making the payments on time. This documentation should be provided when you apply for the loan. There’s a chance that the lender may ask for an updated copy before closing if there’s a considerable time gap between the application and closing.
Wiztax Can Help
If you’re considering a home loan and have tax debt that you’re unable to pay off, Wiztax can help you find tax relief when applying for a mortgage. Call us at 866-568-4593 to see how we can help or visit our contact us page to reach out.
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