Can You Buy a House If You Have a Payment Plan With the IRS?

Obtaining a home mortgage while managing an existing payment plan with the Internal Revenue Service (IRS) is a common concern. While an IRS payment agreement introduces considerations for lenders, it does not automatically disqualify an applicant from securing a mortgage. Navigating this process successfully requires understanding how lenders evaluate such arrangements and what steps can facilitate a smoother application. This article provides insights into purchasing a home with an active IRS payment plan, from financial standing to the mortgage application process.

IRS Payment Plans and Your Financial Standing

An IRS payment plan, such as an Installment Agreement or an Offer in Compromise, represents a formal arrangement with the tax authority to resolve outstanding tax liabilities over time. While demonstrating a commitment to addressing tax debt, the existence of such a plan impacts an individual’s overall financial standing and visibility to other financial institutions. The monthly payments made under these agreements become a fixed obligation, directly affecting available disposable income.

When significant tax debt exists, the IRS may file a Notice of Federal Tax Lien (NFTL) against a taxpayer’s property. This public record filing alerts creditors to the government’s claim on assets and typically appears on credit reports. Even if the payment plan is not directly reported to credit bureaus, an associated federal tax lien will be visible, indicating a past tax delinquency.

Maintaining consistent, on-time payments to the IRS demonstrates financial responsibility. Lenders reviewing an applicant’s financial history will assess the stability and adherence to these payment obligations. A history of timely payments can reflect positively on an applicant’s ability to manage debt, despite the presence of the tax obligation. Any missed payments or defaults on the IRS plan, however, could negatively impact a lender’s assessment of financial reliability.

Mortgage Lender Considerations for IRS Debt

Mortgage lenders carefully evaluate applicants with an IRS payment plan, primarily focusing on how the ongoing tax obligation affects financial stability and risk. A primary metric scrutinized is the Debt-to-Income (DTI) ratio, which compares monthly debt payments to gross monthly income. The monthly payment amount owed to the IRS under the payment plan is factored into this ratio, potentially affecting an applicant’s eligibility if their total debt obligations exceed lender-specific thresholds, which often range from 43% to 50%.

The presence of a Federal Tax Lien (FTL) is another significant consideration for lenders. An FTL establishes the government’s legal claim to a borrower’s property, including the home being purchased. Lenders typically require that an FTL be addressed before or at the time of closing to ensure their mortgage takes priority. This often involves the lien being fully satisfied (tax debt paid off) or formally subordinated by the IRS, which allows the new mortgage to take a primary position.

Specific loan types have varying guidelines regarding IRS debt and FTLs. For instance, government-backed loans like those from the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) often require borrowers to have made at least three consecutive, on-time payments on their IRS agreement before mortgage approval. Conventional loans, which are not government-insured, may have more flexible criteria but will still assess the impact of the IRS payment and any associated lien. Lenders need assurance that the IRS debt will not jeopardize their collateral or the borrower’s ability to repay the mortgage.

Preparing for a Mortgage Application with IRS Debt

Prospective homebuyers with an IRS payment plan benefit from thorough preparation. Gathering all relevant documentation regarding the IRS debt and payment arrangement is a foundational step. This includes obtaining a copy of the signed Installment Agreement or Offer in Compromise acceptance letter, outlining the repayment plan’s terms. These documents provide lenders with essential details about the monthly payment, remaining balance, and agreement duration.

It is important to collect evidence of consistent, on-time payments made to the IRS. This can be demonstrated through IRS payment history transcripts, requested directly from the IRS, or through bank statements showing regular deductions. A history of timely payments reinforces financial reliability and adherence to agreed-upon terms, a positive indicator for lenders. Understanding the terms and remaining balance of the IRS debt allows for accurate disclosure.

Reviewing a personal credit report for accuracy, particularly concerning any recorded federal tax liens, is another preparatory measure. If a lien is present, understanding its status and ensuring it correctly reflects the current payment plan is important. Addressing discrepancies or inaccuracies on the credit report prior to applying can prevent delays or complications. Proactive preparation streamlines the lender’s review and demonstrates a commitment to managing financial obligations.

The Mortgage Application Process with IRS Debt

When applying for a mortgage with an existing IRS payment plan, transparency and early disclosure to potential lenders are important. Informing the loan officer about the IRS agreement at the outset allows them to guide the applicant through the specific requirements and documentation needed. This upfront communication prevents surprises later in the process and helps set realistic expectations regarding eligibility and timelines.

During the underwriting process, lenders will review all documentation related to the IRS debt. They may request additional information or clarification regarding the payment history, the original tax assessment, or any changes to the payment plan. Underwriters will incorporate the monthly IRS payment into the final debt-to-income calculation, ensuring the total debt burden remains within acceptable limits for the specific loan program. This thorough review helps assess the overall risk associated with the loan.

If a federal tax lien is present on the property or the borrower’s assets, its resolution will become a condition for loan approval. Depending on the circumstances, the lender may require the lien to be paid in full at or before closing. Alternatively, if full payment is not feasible, the IRS may agree to subordinate its lien, allowing the new mortgage to take priority. Obtaining a subordination from the IRS involves a separate application process and can extend the closing timeline by several weeks or months.