Can You Get a HELOC With a Tax Lien?

A Home Equity Line of Credit, or HELOC, provides a flexible way to borrow against the equity in your home. It functions as a revolving line of credit, similar to a credit card, allowing you to draw funds as needed up to a set limit, with your home serving as collateral. In contrast, a tax lien represents a government’s legal claim against your property due to unpaid tax debt. This claim secures the government’s interest in your assets until the debt is satisfied.

How a Tax Lien Affects HELOC Eligibility

A tax lien can significantly complicate obtaining a HELOC due to its impact on lien priority. When a tax lien is filed, it often takes precedence over other claims against the property, including a potential HELOC. This means the taxing authority would be paid before other creditors, such as a HELOC lender, in a foreclosure.

This superior claim substantially increases the risk for any lender considering a HELOC. Their ability to recover funds in a default scenario is compromised because the tax authority has a primary right to the property’s value. Consequently, a tax lien reduces the usable equity in your home from a lender’s perspective, as a portion is already encumbered by the government’s claim.

Lenders are reluctant to approve loans when their collateral position is not secure. A tax lien creates a significant hurdle for HELOC approval, as the inherent risk of a senior lien makes many lenders hesitant to extend new credit.

Lender Considerations for Applicants with a Tax Lien

When evaluating a HELOC application with a tax lien, lenders examine details of the lien and the applicant’s financial standing. They distinguish between federal tax liens, such as those from the Internal Revenue Service (IRS), and state or local tax liens. A public Notice of Federal Tax Lien alerts other creditors to the government’s claim.

The amount and age of the tax lien also play a considerable role. Larger, more recent liens are viewed as more problematic, indicating a higher outstanding debt. Conversely, a smaller, older lien being actively addressed might be perceived with less concern. Lenders also scrutinize the applicant’s overall financial health, including their credit score, debt-to-income (DTI) ratio, and payment history.

A substantial amount of available home equity beyond the first mortgage and the tax lien is required. Lenders need a sufficient “cushion” to protect their investment, given the added risk. Different lenders have varying policies, meaning some financial institutions may be more flexible or willing to work with applicants in these situations.

Addressing an Existing Tax Lien

Resolving or mitigating a tax lien is a necessary step to improve HELOC eligibility. The most direct approach is to pay off the entire tax debt, which prompts the taxing authority to release the lien. For a federal tax lien, the IRS will release the lien within 30 days after the debt is fully paid.

Another option is lien subordination, where the taxing authority agrees to allow a new lien, like a HELOC, to take a higher priority. For federal tax liens, taxpayers can apply for subordination using IRS Form 14134. This process does not remove the lien but reorders its priority, making the property more attractive to a HELOC lender.

Entering an installment agreement, a formal payment plan with the taxing authority, demonstrates a commitment to resolving the debt. While an installment agreement may not prevent a tax lien from being filed, it shows proactive effort and can be a condition for lien withdrawal. For federal tax liens, if the amount owed is below a certain threshold and payments are made via direct debit, the IRS may not file a lien or might withdraw an existing one.

A lien withdrawal removes the public notice of the lien, making it appear as if the lien was never filed, even if the debt still exists. This differs from a lien release, which occurs when the debt is satisfied but the public record of the lien remains. Taxpayers can request a withdrawal if the lien was filed in error or if they enter a direct debit installment agreement. Obtain official documentation, such as a Certificate of Release of Federal Tax Lien or a Certificate of Subordination, to provide to potential lenders.

Applying for a HELOC with a Tax Lien

Once steps have been taken to address an existing tax lien, the HELOC application process begins. Seek lenders experienced with complex financial situations, as smaller, local financial institutions might offer greater flexibility than larger national banks.

Transparency with potential lenders is important from the outset. Disclose the tax lien and provide detailed information regarding its status, including steps taken towards resolution. This upfront honesty allows the lender to assess the situation accurately.

Homeowners will need to provide documentation related to the lien’s status. This includes proof of lien payoff, a formal lien release, a subordination agreement, or details of an active payment plan. These documents demonstrate the lien is being managed or resolved, mitigating lender risk. The application process involves a credit check, property appraisal, and underwriting review, where a tax lien triggers additional scrutiny.

Manage expectations regarding approval, potential interest rates, and associated fees. Even with steps taken to address a lien, lenders may view the application as higher risk, which could result in less favorable terms or denial. However, demonstrating a clear path to resolving the tax debt significantly improves the chances of securing a HELOC.