Can You Buy a House Owing the IRS?

Homeownership is possible even with outstanding tax debt, though it involves specific financial considerations. While owing the Internal Revenue Service (IRS) introduces complexities, it does not automatically disqualify a home purchase. Understanding and proactively addressing the tax debt can significantly influence mortgage eligibility.

Understanding the Impact of Tax Debt on Home Buying

Outstanding tax debt affects an individual’s financial profile from a mortgage lender’s perspective, primarily influencing creditworthiness and debt-to-income (DTI) ratios. Lenders scrutinize an applicant’s financial history to assess their ability to meet mortgage obligations. Unpaid tax debts are often viewed as a financial risk, potentially making lenders hesitant to approve a loan.

Unpaid taxes do not directly appear on credit reports or immediately lower credit scores. However, if the IRS files a Notice of Federal Tax Lien, this public record can be discovered by lenders, signaling a legal claim against assets. This public notice can limit the ability to obtain credit and may lead to loan denials or higher interest rates.

Tax debt directly impacts a borrower’s debt-to-income (DTI) ratio. Any required monthly payments toward the tax liability, such as those under an IRS payment plan, are included in the calculation of total monthly debt. A high DTI ratio can push a borrower beyond acceptable limits for mortgage approval, as lenders prefer borrowers with manageable debt burdens.

Federal Tax Liens and Real Estate

A federal tax lien represents the government’s legal claim against a taxpayer’s property when tax debt remains unpaid. This claim secures the government’s interest in all assets, including real estate, personal property, financial assets, and any property acquired after the lien is established.

The IRS establishes this claim by assessing tax liability, sending a Notice and Demand for Payment, and filing a public “Notice of Federal Tax Lien.” This notice alerts creditors and the public that the government has a legal right to the taxpayer’s property. While the lien exists from the time of assessment, the public filing ensures its validity against other creditors.

A federal tax lien significantly complicates or can prevent the purchase, sale, or refinancing of real estate. Title companies discover recorded federal tax liens during property transactions. Such a lien clouds the property title, making it challenging to transfer a clear and marketable title to buyers.

A federal tax lien must be satisfied or formally released by the IRS before a property transaction can close. If a property with a lien is sold, the lien usually needs to be paid out of the sale proceeds. In some cases, the IRS may agree to discharge the lien from a specific property to facilitate a sale, especially if the proceeds are used to pay down the debt.

Addressing Tax Debt Before or During Home Purchase

Individuals with tax debt can pursue strategies to manage or resolve their obligations, improving mortgage eligibility. One common approach is an Installment Agreement (IA) with the IRS. This allows taxpayers to make manageable monthly payments over a period, typically up to 72 months, for tax liabilities under $50,000 including interest and penalties.

An approved Installment Agreement demonstrates active management of tax debt, which can improve loan approval chances. Some loan programs, such as FHA loans, may consider applicants with an IRS payment plan after a consistent record of on-time payments. Fannie Mae also allows for mortgage approval with an IRS installment agreement, provided the monthly payment is included in the DTI calculation and there is no federal tax lien filed in the county where the property is located.

Another option for resolving tax debt is an Offer in Compromise (OIC), which allows taxpayers to settle their tax liability for a lower amount. This is typically considered when there is doubt as to collectibility, doubt as to liability, or when collection would create economic hardship. While an accepted OIC can resolve the debt, the process can be lengthy and requires specific financial circumstances.

The most straightforward way to eliminate the obstacle posed by tax debt is to pay the amount owed in full. Full payment removes the debt entirely and clears the path for mortgage approval. If a federal tax lien exists, paying the debt in full is the easiest way to have the lien released.

Consult with qualified tax professionals, such as Enrolled Agents, Certified Public Accountants, or tax attorneys, and mortgage lenders early in the home-buying process. These professionals provide tailored advice, help navigate IRS programs, and ensure necessary documentation is prepared. They can also advise on options like lien subordination or lien withdrawal.