If I Owe the IRS, Can I Buy a House?

Owing the Internal Revenue Service (IRS) can complicate homeownership. This situation involves financial and legal considerations that influence a person’s ability to secure a mortgage and purchase property. Understanding these implications is an important step for anyone with federal tax debt considering a home purchase.

How IRS Debt Affects Mortgage Approval

Mortgage lenders assess a borrower’s financial standing, including outstanding debts, to determine loan eligibility. Unpaid tax debt can raise concerns for lenders, as it may indicate financial instability. Lenders primarily focus on a borrower’s debt-to-income (DTI) ratio and overall creditworthiness. A high DTI ratio, which compares monthly debt payments to gross monthly income, can make it more difficult to qualify for a mortgage.

Outstanding IRS debt, especially if not under an established repayment plan, directly increases a borrower’s DTI. This can lead lenders to perceive a higher risk, potentially affecting mortgage approval or resulting in less favorable interest rates. While tax liens generally do not appear on standard credit reports, lenders typically conduct public record searches that reveal any filed liens. Unresolved federal tax debt can make a borrower ineligible for certain mortgage types.

Different mortgage programs have varying requirements regarding federal debt. Some conventional loan programs may be difficult to obtain with an active tax lien. Federal Housing Administration (FHA) loans might allow approval if a formal repayment plan is in place and payments have been consistently made for at least three months. Lenders require proof of a formal IRS repayment agreement, such as an Installment Agreement, and a history of consistent payments.

Understanding Federal Tax Liens

A federal tax lien is a legal claim the U.S. government places on a taxpayer’s property when they neglect or fail to pay a tax debt after demand. This claim secures the government’s interest in all of a taxpayer’s assets. A federal tax lien automatically arises once the IRS assesses a tax liability and issues a notice and demand for payment, even if it is not immediately public.

To alert creditors and the public to this claim, the IRS may file a public document called a Notice of Federal Tax Lien (NFTL). This public filing signals the government’s legal right to the taxpayer’s property. The lien attaches to all present and future assets while it remains in effect.

The presence of a filed NFTL can significantly complicate property transactions, making it challenging to obtain clear title or close on a sale. Title companies identify these liens during property searches, which can prevent the issuance of title insurance, a common requirement for mortgages. A tax lien can also affect a property’s marketability and make refinancing difficult, as the IRS’s claim generally takes priority over other creditors. Options like lien subordination or a lien discharge exist.

Strategies for Addressing IRS Debt

The IRS offers several formal programs to help taxpayers manage or resolve their tax liabilities. Engaging with these programs can make the debt more manageable for lenders and potentially affect the status of federal tax liens.

An Installment Agreement allows taxpayers to make monthly payments, typically up to 72 months, to pay off their tax debt. Having an Installment Agreement in good standing can positively influence mortgage qualification, as lenders view the debt as actively managed. For certain direct debit Installment Agreements, the IRS may withdraw the Notice of Federal Tax Lien if the debt is $25,000 or less, paid in full within 60 months, and the taxpayer meets compliance requirements and has made at least three consecutive direct debit payments.

Another option is an Offer in Compromise (OIC), which allows certain taxpayers to settle their tax debt for a lower amount. Eligibility for an OIC is based on the taxpayer’s ability to pay, income, expenses, and asset equity, considering factors like doubt as to collectibility or liability. If an OIC is accepted and the agreed-upon amount is paid in full, the IRS will release the federal tax lien.

For taxpayers experiencing severe financial hardship, the IRS may place their account in Currently Not Collectible (CNC) status. While in CNC status, the IRS temporarily ceases active collection efforts, such as levies, because the taxpayer cannot pay without experiencing hardship. Interest and penalties continue to accrue, and the IRS may still file a Notice of Federal Tax Lien while an account is in CNC status. This status is not a permanent solution.