How to Qualify for a Mortgage With Unfiled Tax Returns

Most lenders won't give you a mortgage if you have unfiled tax returns, but it can be possible if you work with an alternative lender. Generally, the best option is to file your tax returns, set up payment plans on unpaid taxes, and get tax liens removed before you start the loan process. To help you out, this guide explains why most mortgage lenders require tax returns, options for getting a loan without tax returns, and what to do if you have unfiled returns and want to buy a home.

Key takeaways

• Mortgage lenders use tax returns to verify your income.
• You cannot get FHA, USDA, VA, or Fannie Mae/Freddy Mac loans without a tax return.
• Some alternative lenders may work with you - expect higher down payments and higher interest rates.
• For the best loan terms, file old tax returns before applying for a mortgage.
• Making installment payments on your tax debt will not stop you from getting a mortgage.

Why Mortgage Lenders Ask for Your Tax Return

A mortgage is the biggest loan most people will ever take out, and your lender needs to feel confident that you can repay this large sum of money. To learn about your financial situation, the lender looks at your proof of income, tax returns for the last year or two, credit report, and other financial documents. 

You may send your tax returns directly to the lender, or they may use the Income Verification Express Service to get your information from the IRS. If you cannot provide this information, most lenders won't approve your mortgage application.

Underwriting Rules for for Most Mortgages

The majority (70%) of mortgage loans in the United States are underwritten by Fannie Mae or Freddie Mac. You must provide a tax return to obtain either of these loans, but if you apply between April and October, you may be able to use last year's tax return as long as you have proof that you filed an extension and paid any estimated quarterly tax for the year. The Federal Housing Administration (FHA), the United States Department of Agriculture (USDA), and the Department of Veteran Affairs (VA) offer government-backed loans with looser financial standards than conventional mortgages, but these loans also require tax returns. 

Mortgages You Can Get Without a Tax Return

A very small handful of lenders may be willing to give you a no-tax-return mortgage which is sometimes referred to as a no-doc or low-doc mortgage. They generally fall into the following two categories:

Institutional No Tax Return Mortgage Lenders - These lenders take a close look at your income documents and your bank account statements. Because they work with high-risk clients, they typically charge higher interest rates than other lenders. If you get a no-tax-return mortgage, you should expect to pay 10 to 20% or more as a down payment. 

Asset-Based Mortgages - If you have a lot of near-liquid assets (low-risk stocks, bonds, etc), you may be able to get a mortgage based on the value of your assets. These loans are sometimes called asset depletion loans. The loan is set up as if your annual income is the total of your assets divided by the term of the loan. For example, if you have $1 million, that equates to $50,000 per year over a 20-year loan.

Owner-Carry Mortgage Lenders - This is when you make payments directly to the property owner. Because these loans are handled between individuals, they don't have the same stringent requirements as traditional mortgages. Owner-carry loans can be useful in some situations but risky or even predatory in others. Keep in mind that many owner-carry arrangements come with a balloon payment.

You make monthly payments for anywhere from a year to a decade. Then, you have to pay off the remaining value of the property in a lump sum called a balloon. To cover the balloon payment, you typically have to go to a traditional lender, and you may struggle to obtain a loan if you have unfiled returns. Consult with an attorney or realtor before taking out this type of loan.

What to Do If You Want a Mortgage and Have Unfiled Returns

If you're ready for homeownership but have unfiled returns, you can explore the options above, but they will likely cost you more money in the long run. The best option is to deal with your unfiled tax returns. 

• Gather your documents and do your tax returns - If you hire a tax pro, they will easily be able to get your income documents from the IRS to complete your tax return. If you are self-employed, however, you will need to dig into your bank statements, sales reports, and other financial documents to put together the numbers.
• Complete the last six years of returns - Regardless of how far behind you are, you generally only need to do the last six years to get compliant with the IRS, and the mortgage lender will typically want to see the last year or two.
• Request penalty relief - When you file your delinquent returns, you will incur penalties. Ask the IRS for penalty abatement to reduce the total amount you owe.
• Set up payment plans if you owe taxes - If your tax returns show tax due, make sure to set up a payment plan as soon as possible. The lender will consider your monthly tax payments along with any other debt payments when looking at your debt-to-income ratio.
• Address tax liens - If the IRS has issued a tax lien against you, ask them to remove it. If you owe less than $50,000, they will generally remove tax liens once you make three monthly payments on an installment agreement. If you owe over $50,000, you may need to get the lien subordinated before you can get a mortgage.
• Work on your credit score - While dealing with your unfiled tax returns, also take steps to improve your credit score. Pay down credit card debt and contact the credit bureaus if there are any mistakes on your report. The higher your score, the better your loan terms will be.
• Save up a downpayment - A big downpayment can help improve your chances of success, but if that's not possible, stick with FHA, USDA, or VA loans which all have low downpayment requirements.

Remember in some cases, filing old tax returns can put money into your pocket. If you have a refund, you can claim that three years after the filing due date. That can help you with your downpayment and also offset taxes you may owe for other years.

Can You Obtain a Mortgage If You Have Unpaid Taxes?

If you file your returns and owe tax, that won't necessarily prevent you from qualifying for a mortgage. However, your mortgage lender will want to see proof of your payment arrangement, and they will take these payments into account when calculating your debt-to-income (DTI) ratio. The DTI requirements vary from lender to lender, but typically, you should aim for 36% or below. That means that 36% of your monthly income goes toward debts including your tax repayments, student loans, car loans, your mortgage, and any other debts you have.

Most mortgage lenders want to see that you've been making payments for a few months. If you're in the first or second month of your installment agreement, you may want to wait a bit before applying. Don't be afraid to ask the loan officer about your situation — they deal with all kinds of borrowers, and they can give you advice on what to expect during the home-buying process if you have unpaid taxes.

Applying for Mortgages When You Have a Tax Lien

The IRS can also place a lien on your assets if you have unfiled returns. When you don't file your returns, the agency can assess how much you might owe and send you a bill. Usually, this bill is more than you actually owe, and if you don't respond, the IRS can issue a tax lien. Sometimes, even if you set up a payment arrangement, the IRS will still place a lien on your assets.

A lien is the government's legal claim to your assets. If you sell assets while a lien is in place, the government has the right to take the proceeds of the sale. For best results, you should work with a tax pro to get the lien removed. If the IRS refuses to remove the lien, you may need to get it subordinated. By subordinating the lien, the IRS agrees that your mortgage lender has priority if your property ever goes into foreclosure.

Get Help Applying for a Mortgage When You Have Unfiled Returns

If you have unfiled returns, unpaid taxes, or a tax lien, homeownership can still be possible, but you will need to jump through a few extra hoops before you sign the mortgage and get your new home. For best results, you should contact a tax pro to help you. They can help you file returns, set up payment plans, or deal with tax liens so that you can confidently apply for a mortgage. 

Don't let tax issues stop you from becoming a homeowner. Instead, get help today. Search our directory to find a tax pro in your local area who is experienced with these issues. You can use the search box below.