Are you wondering if owing taxes will stop you from buying a house? The short answer is that tax debt doesn’t automatically prevent you from getting a mortgage. However, it can make the process more complicated. Here’s what you need to know if you’re thinking about buying a home while you owe money to the IRS.
Owning a home is a significant financial step, and lenders carefully evaluate your financial health before approving a mortgage. If you have unpaid taxes, it’s crucial to understand how this debt might affect your mortgage application. While a tax debt doesn’t mean an automatic denial, it does require careful handling and planning.
What to Expect When Applying for a Mortgage With Unresolved Tax Issues
The Challenge of Unfiled Tax Returns
If you haven’t filed your taxes, getting approved for a mortgage can be difficult. Lenders typically require your W-2 forms from the last two years to verify your income. These forms are essential for proving that you’ve been making enough money to cover your future mortgage payments. Without filed tax returns, you can’t provide these forms, making it hard for lenders to trust your financial stability.
When lenders can’t verify your income, they are less likely to approve your mortgage. This means you must file any unfiled tax returns to move forward with your mortgage application. Filing your taxes, even if you owe money, can also help you access tax relief options. Plus, you might receive a tax refund, which can help with your down payment.
Navigating a Tax Lien
If the IRS has placed a lien on your property because of unpaid taxes, securing a new mortgage becomes even more challenging. A tax lien is a significant red flag for lenders, indicating that you have unresolved financial issues. However, if you are on a repayment plan with the IRS and have been making consistent payments, some lenders might still consider your application.
Lenders will assess whether you can manage both your mortgage and tax payments. They will include your monthly tax repayment in your debt-to-income ratio to ensure you can handle the financial burden. You will need to show proof of your repayment agreement with the IRS and your payment history to demonstrate your commitment to resolving your tax debt.
The Impact of State Taxes
Unpaid state taxes can also affect your ability to get a mortgage. Like federal taxes, unpaid state taxes can lead to liens and other complications that make lenders hesitant to approve your application. It’s essential to address any state tax issues before you apply for a mortgage to increase your chances of approval.
State tax debt can be just as damaging to your mortgage application as federal tax debt. Lenders look at your overall financial health, and unresolved state taxes can signal potential financial instability. By resolving your state tax issues, you can present a more robust financial profile to lenders.
Why You Should Resolve Tax Debt Before Applying
Even if you can get a mortgage with tax debt, ignoring your tax problems can lead to higher interest rates. High interest rates mean you’ll pay more over the life of your mortgage. Resolving your tax issues can help you secure better loan terms and save you money in the long run.
Addressing your tax debt not only improves your chances of mortgage approval but also helps you secure more favorable terms. Lower interest rates mean lower monthly payments and less money spent on interest over the life of your loan. Taking steps to resolve your tax debt can significantly impact your financial future.
Steps to Take for a Mortgage With Tax Debt
- Set Up a Repayment Plan: Work with a tax professional to create a repayment plan with the IRS. Obtain a copy of the agreement showing your monthly payments.
- Make Consistent Payments: Most lenders want to see three to twelve months of on-time payments before they approve your mortgage.
- Inform Your Lender: When applying for a mortgage, let your lender know about your repayment plan. Provide documentation of your agreement and payment history.
- Obtain a Subordination Agreement: If you have a tax lien, you might need a Subordination Agreement from the IRS. This document ensures that the IRS’s claim is secondary to your mortgage lender’s claim in case of foreclosure.
FAQs
Can I still get a mortgage if I owe taxes?
Yes, you can still get a mortgage if you owe taxes, but it may be more challenging. Lenders want to see that you have a plan to repay your tax debt and that you can manage both your mortgage and tax payments.
Will unpaid state taxes affect my mortgage application?
Unpaid state taxes can negatively impact your mortgage application just like federal tax debt. Addressing state tax issues is crucial for improving your chances of approval.
How does a tax lien affect my ability to get a mortgage?
A tax lien makes it harder to get a mortgage, but having a repayment plan with the IRS and making consistent payments can help your case.
Can I lower my mortgage interest rate if I have tax debt?
Resolving your tax debt and securing a repayment plan can improve your chances of getting a lower interest rate on your mortgage.
What is a Subordination Agreement?
A Subordination Agreement ensures that the IRS’s claim is secondary to your mortgage lender’s claim in case of foreclosure, which can be necessary if you have a tax lien.
Owning a home is possible even if you owe taxes, but addressing your tax issues first is crucial. Filing any unfiled returns, setting up a repayment plan, and making consistent payments can improve your chances of getting a mortgage. By tackling your tax debt, you’ll be in a better position to secure favorable loan terms and achieve your dream of homeownership.
For assistance with resolving your tax issues and improving your chances of mortgage approval, contact Tax Resolution Services of Hawaii. Our expertise can guide you through the process and help you get back on track.
