Does an IRS Payment Plan Affect a Mortgage?

Many prospective homebuyers wonder how an outstanding tax obligation and an IRS payment plan might influence securing a mortgage. This article explores how an IRS payment plan can affect a mortgage application, providing insights into lender evaluations and program-specific requirements.

Understanding IRS Payment Plans

The Internal Revenue Service (IRS) offers various payment solutions for outstanding tax liabilities. These options allow taxpayers to manage their financial obligations over time instead of requiring an immediate lump-sum payment.

An Installment Agreement allows taxpayers to make monthly payments for up to 72 months. This arrangement is available for individuals who owe $50,000 or less in combined tax, penalties, and interest, provided all required returns are filed. The monthly payment amount is based on the taxpayer’s ability to pay, and interest and penalties continue to accrue.

For those with significant financial hardship, an Offer in Compromise (OIC) allows taxpayers to settle their tax debt for a lower amount than originally owed. The IRS evaluates the taxpayer’s ability to pay, income, expenses, and asset equity to determine if an OIC is appropriate.

A Short-Term Payment Plan offers a temporary solution for taxpayers who can pay their full tax balance within 180 days. To qualify, individuals need to owe less than $100,000 in combined tax, penalties, and interest.

Mortgage Lender Evaluation of IRS Debt

Mortgage lenders assess a borrower’s financial health, and an IRS payment plan is a factor in this evaluation. Lenders ensure a borrower can comfortably manage existing debts and a new mortgage payment.

The monthly payment for an IRS installment agreement is factored into a borrower’s Debt-to-Income (DTI) ratio. This ratio compares total monthly debt payments to gross monthly income, determining loan qualification. A higher DTI ratio indicates a reduced capacity for additional debt, potentially impacting mortgage approval or the loan amount offered.

While the IRS does not report payment activity to major credit bureaus, a federal tax lien can impact a borrower’s credit. A Notice of Federal Tax Lien is a public record signifying a legal claim by the government against a taxpayer’s property due to unpaid taxes. Although tax liens no longer appear on credit reports, they are public information lenders can access. Their presence can negatively influence a lender’s risk assessment, potentially leading to higher interest rates or loan denials.

Lenders require documentation of any IRS payment plan. This includes the official IRS installment agreement letter, outlining repayment terms and monthly payment amount. Lenders also seek proof of consistent, on-time payments to the IRS, demonstrating the borrower’s reliability. Financial stability and payment history are important considerations for mortgage underwriters.

Specific Mortgage Program Requirements

Different mortgage programs have specific guidelines regarding outstanding IRS debt and payment plans. These guidelines dictate how an IRS payment plan impacts eligibility for conventional, FHA, VA, and USDA loans.

Conventional loans, backed by Fannie Mae and Freddie Mac, allow for borrowers with IRS installment agreements. Fannie Mae guidelines permit the monthly payment in the borrower’s DTI ratio, provided no Notice of Federal Tax Lien is filed. Borrowers need to demonstrate at least one payment has been made on the agreement before closing. Freddie Mac also includes the IRS payment in the DTI calculation if more than 10 months of payments remain, requiring verification that the borrower is current and no federal tax lien has been filed.

Federal Housing Administration (FHA) loans require a minimum of three consecutive, on-time payments on the IRS installment agreement. This applies even if a federal tax lien has been filed, as long as payments are current. The FHA also includes the monthly IRS payment in the borrower’s DTI calculation.

For Veterans Affairs (VA) loans, an IRS installment agreement is acceptable as long as payments are made as agreed. The monthly IRS payment is considered part of the borrower’s overall debt obligations and is factored into the DTI ratio.

USDA loans accommodate IRS payment plans. Similar to FHA, USDA guidelines require a minimum of three timely payments on the IRS repayment agreement. These payments cannot be prepaid in a lump sum to meet this requirement. The monthly installment amount is included in the borrower’s DTI ratios.

Navigating the Mortgage Application

Applying for a mortgage while managing an IRS payment plan requires a proactive and transparent approach. Providing necessary documentation and maintaining clear communication with the mortgage lender can streamline the process.

Borrowers should openly communicate with their mortgage lender about an IRS payment plan from the outset. This transparency allows the lender to assess the financial situation and guide the borrower through specific requirements. Withholding this information can delay or complicate the approval process.

Lenders require specific documents to verify the IRS payment plan. These include a copy of the official IRS Installment Agreement and proof of payments made to the IRS, such as bank statements or canceled checks. Tax transcripts from the IRS may also be necessary.

Maintaining consistent, on-time payments to the IRS is important when seeking a mortgage. Lenders view a reliable payment history as an indicator of financial responsibility. Keeping thorough records of all IRS communications and payments provides clear evidence of compliance.