Can You Get a Mortgage With Unfiled Taxes?

It is possible to obtain a mortgage even with unfiled tax returns, though it presents challenges. Lenders require specific financial documentation to assess an applicant’s ability to repay a loan. Resolving unfiled tax issues and addressing any resulting tax debt are often necessary steps before a mortgage can be secured.

Lender Requirements and Concerns

Unfiled tax returns create significant concerns for mortgage lenders because they hinder the verification of an applicant’s income and the accurate assessment of their debt-to-income (DTI) ratio. Lenders need proof that a borrower can consistently afford mortgage payments, and tax returns serve as a reliable source for this income verification, especially for self-employed individuals. Without filed returns, lenders may view an applicant as a higher risk, potentially leading to loan denial, higher interest rates, or stricter lending terms.

To mitigate this risk, mortgage lenders require specific tax documentation. They often request tax returns for the past two years, such as Form 1040, and may also ask for Schedule C if the applicant is self-employed. The verification process involves IRS tax transcripts. Lenders request these directly from the IRS using Form 4506-C, “IVES Request for Transcript of Tax Return,” to cross-check income reported on loan applications with official IRS records. This process helps ensure the financial information provided by the borrower is consistent.

A major concern for lenders is the potential for federal tax liens. An unfiled tax return, especially if it leads to unpaid taxes, can result in the IRS filing a tax lien, which is a legal claim against a taxpayer’s property for unpaid tax debt. While tax liens do not appear on credit reports, lenders will discover them during a lien search. An active tax lien can complicate mortgage approval, as it signals that the government has a priority claim on the borrower’s assets.

Steps to Resolve Unfiled Tax Returns

Becoming compliant with the IRS regarding unfiled tax returns involves gathering financial documents. To prepare past-due returns, you will need income statements, such as W-2s for wages, 1099s for various income types, and bank statements to verify income and expenses. If you are missing W-2s or 1099s, you can request wage and income transcripts from the IRS using Form 4506-T, or contact your employer or payer directly. Collect records of any deductions or credits, such as receipts for business expenses, charitable donations, or mortgage interest.

Once documentation is compiled, the next step is to prepare and submit the unfiled tax returns. Use the correct tax forms and instructions for each tax year. The IRS encourages taxpayers to file all past-due returns, even if they cannot immediately pay the tax liability, to avoid further penalties and interest. You can file these returns by mail.

If a tax liability results from filing, the IRS offers several options for addressing the debt. An Installment Agreement allows taxpayers to make monthly payments. To request an Installment Agreement, individuals can submit Form 9465, “Installment Agreement Request.” Penalties and interest will continue to accrue on the unpaid balance. An Offer in Compromise (OIC) allows the IRS to settle tax debt for a lower amount than what is owed, based on ability to pay. To qualify for an OIC, all required tax returns must be filed, and the taxpayer must not be in an open bankruptcy proceeding.

Applying for a Mortgage with a Tax History

After unfiled tax returns have been submitted and any resulting tax liabilities are addressed, the focus shifts to the mortgage application process. Lenders evaluate applicants with a history of unfiled taxes or an ongoing IRS payment plan by examining their financial stability and adherence to the agreed-upon tax resolution. Fannie Mae and Freddie Mac permit IRS payment plans, but the monthly payment must be factored into the borrower’s debt-to-income (DTI) ratio.

Lenders prioritize consistency in income reporting and verification through IRS transcripts. They seek assurance that the income used to qualify for the loan aligns with what was reported to the IRS. If an applicant is on an IRS payment plan, most lenders require proof of consistent, on-time payments before approving a loan. This payment history demonstrates financial responsibility and commitment to resolving the tax debt.

Applicants should provide documentation of their resolved tax situation. This includes evidence of past-due returns being filed and proof of adherence to any IRS payment plan. This might involve providing a copy of the Installment Agreement (Form 9465) or the Offer in Compromise (Form 656), along with bank statements or canceled checks showing regular, timely payments. A letter from the IRS confirming compliance or the establishment of a payment arrangement can also be beneficial. While an IRS payment plan increases the DTI, it does not automatically disqualify an applicant from obtaining a mortgage.