Can You Buy a House If You Owe Taxes?

buying a house

Unpaid taxes can make it hard to buy a home, but if you set up a payment plan on your tax debt, some lenders may be willing to work with you.

This only applies when you have filed your returns but still need to pay the tax. If you're trying to buy a home when you have unfiled taxes, it can be nearly impossible to borrow money from a traditional mortgage lender.

Buying a home is an exciting event, but it can also be a confusing process. If you owe taxes to the Internal Revenue Service or your state, you probably have all kinds of questions like, Can I buy a house if I owe taxes? Can I buy a house if I owe the IRS? Will unpaid state taxes affect my ability to buy a home?

The exact answers depend on the situation, but in this guide, we outline what you need to know about how delinquent tax debt affects the home-buying process.

Can You Get a Mortgage If You Owe Taxes?

It is possible to get a mortgage if you have state or federal tax debt, but tax debt makes it harder to obtain a mortgage. It also depends on how delinquent your tax debt is and whether or not you've made arrangements to repay the Internal Revenue Service or your state.

Generally, if you're on a payment plan for your state or federal tax debt, mortgage lenders will be willing to work with you as long as you meet the other criteria for mortgage approval. However, most lenders won't offer you a mortgage if you have seriously delinquent tax liabilities until you take care of the taxes owed. A federal tax lien can make it nearly impossible to take out a mortgage.

How Do Lenders Know That You Owe Taxes?

When lenders review your loan application, they look into your credit history. IRS tax liabilities don’t show up on credit reports. But during the manual underwriting process, lenders do a public search which will reveal if you have a state or IRS lien.

Most lenders will require you to provide your most recent tax return. They may request several years of returns if you are self-employed. They can see from your tax return if you owed an IRS tax debt when you filed, and they will ask you if you still owe taxes. They may even request a payment receipt from the Internal Revenue Service.

You also must provide detailed information about your finances when you apply for a home loan. Generally, you need to tell the lender about your outstanding debts and monthly payments. Failure to do so constitutes loan fraud. To put it another way, you can't legally hide the fact that you owe tax debt.

How Back Tax Payments Affect Mortgage Approval

As indicated above, most lenders will be willing to work with you if you are making installment payments on your IRS or state taxes. However, you will need to share information about your payment plan, and the lender will consider your tax liabilities when calculating your debt ratios.

In particular, mortgage lenders look at your debt-to-income ratio. Expressed as a percentage, this refers to the portion of your gross (pre-tax) monthly income that goes to debt repayments. This is where your back taxes can start to affect your mortgage offers.

Typically, they calculate a front-end ratio that includes your mortgage payment, homeowner's insurance, and property tax. Then, they create a back-end ratio that includes the mortgage payments plus any other debts you have, such as car loans, student loans, credit cards, and IRS or state tax debts.

To give you an example, imagine that your gross monthly income is $5,000. Your debt payments, including your monthly payment on your tax liability, add up to $3,000 per month. This means that you have a 60% debt-to-income ratio. Most lenders are only willing to approve mortgage loans for applicants with under a 45% debt-to-income ratio.

A large monthly tax payment can increase your debt-to-income ratio. If it increases the ratio too much, you may not be able to get a mortgage.

How Long Do You Need to Make Payments Before You Can Get a Mortgage?

Lenders also want to see that you've been making progress on your repayment agreement. The requirements vary from lender to lender, and economic factors can also influence them.

Generally, however, you need to have made at least one monthly payment to get a conventional mortgage. If you're applying for an FHA loan which is a loan guaranteed by the Federal Housing Administration, you typically need to show at least three months of payments on your repayment agreement.

Note that these rules only apply if you have an established installment agreement on your tax bill. If you're just sending in payments without being on an approved payment plan, that won't help your situation.

Applying for a Mortgage When You Have an IRS Tax Lien

The IRS or your state can issue a tax lien against you if you have delinquent back taxes. The lien is a public record that attaches to all of your assets.

Here's a quick example. Imagine that you own a piece of property and you sell it when you have a federal tax lien. The proceeds from the sale will first go to satisfy the lien, and only then will you get the remaining amount.

Tax liens attach to your current and future assets. That means the lien will attach to the home once you buy it. Most mortgage lenders do not look fondly at this situation. They will likely see you as a financial risk and worry that you won't repay the mortgage.

Some private lenders are willing to work with borrowers with tax liens or other tax issues, but you should expect to pay a higher interest rate or make a more significant down payment. In some cases, you can get FHA loans when you have federal tax liens, but you won't be able to get conventional loans that adhere to Fannie Mae or Freddy Mac standards.

How Federal Tax Liens Affect Selling Your Home

Having a tax lien can also affect you if you want to sell or refinance your home. When you sell your home, the sale proceeds first go to all the lienholders.

If you owe a mortgage on the home, that lender usually has priority. Then, after the mortgage debt has been satisfied, the liens for taxes get paid. Finally, any additional liens are addressed. Typically, the precedence of the liens is based on when they were issued.

You can sometimes buy or sell a home for cash when there is a tax lien attached, but the buyer will assume the lien along with the house. This typically applies in situations with unpaid property taxes rather than income taxes.

If you're considering buying a home with liens, make sure you know how the process works before you move forward.

How Tax Debt Affects Refinancing a Home Loan

Refinancing a home is when you take out a new mortgage and repay the old home loan. Typically, people do this when they can get better terms with the new mortgage.

A tax lien for back taxes can also complicate this process. Most lenders won't refinance if you have a tax lien against the home. A tax lien can also make it hard (or potentially impossible) to take out a home loan against the home's equity.

A home equity loan is secured by the equity that you have in your home. Equity refers to the difference between the home's value and how much you owe on the home loan. When the lender reviews your application, they'll see that you have a tax lien against the home, and they generally won't approve the equity loan.

However, there is one significant exception. Say that you have a federal tax lien and take out a home equity loan to pay your back taxes. In this case, you can contact the IRS and ask to have the lien subordinated.

This allows the tax lien to take second place behind the new home equity loan. That makes the lender more comfortable and more willing to approve the loan.

Can You Buy a House If You Owe State Taxes?

You may be able to get a home loan if you have unpaid state taxes. But your options will be limited, and generally, you can only get loan approval if you are on an established payment plan with your state's department of revenue.

States all have their own rules and processes for unpaid taxes. Most states are willing to set up payment plans, but the terms can vary from state to state. If you are on a payment plan for state back taxes, your mortgage lender will consider the payments when calculating your monthly debt-to-income ratio.

Can You Buy a House If You Have State Tax Liens?

Most states will issue a state tax lien if you ignore your state tax liability. In some states, this is called a tax warrant. Whether it's called a lien or a warrant, it attaches to your assets and creates a public record of your tax liability.

A state tax lien affects you just like a federal tax lien. It will make all lenders look at you as a bigger risk. That typically leads to higher interest rates or a higher down payment requirement.

You may get private mortgages, FHA loans, or even a VA loan when you have a state tax lien, but you typically won't be able to get conventional loans, also called Fannie Mae/Freddy Mac mortgages.

What to Do If You Have Unpaid Taxes and Want to Buy a Home

Now you know the answer: Can I buy a house if I owe the IRS or the state, but what should you do? If you want to buy a home if you owe back taxes, you must deal with your tax bill first. Here are some of your options.

Pay off your tax debt in full — If possible, pay off your tax debt in full. Once you pay off the debt, the IRS or state will remove any liens that they have issued against you. You can pay tax debt with a credit card, but if you do, make sure that you consider the interest rate and how the increased credit card debt will affect your ability to get a loan.
Set up an installment agreement — An installment agreement lets you make payments on your tax bill, but as explained above, these payments will affect your debt-to-income ratio. You may also need to make one to three payments before you can get approved for most mortgages.
Apply for an offer in compromise — If you cannot afford to pay your tax debt in full or through payments, you can apply for an offer in compromise. This is where the IRS lets you pay off your tax debt for less than you owe.
Explore other tax resolution options — If you don't think you truly owe the taxes, you may qualify for an offer in compromise based on doubt as to liability or innocent spouse relief if the debt was due to your former spouse's actions. When you contact an experienced tax attorney, a CPA, or an enrolled agent, they can outline the options for your situation.
Request penalty relief — Penalty relief won't eliminate your tax debt, but if you qualify, it will reduce your tax debt. That helps your debt-to-income ratios, and it saves you money in the long run.

If you owe back taxes, you may need to devote some time to taking care of your tax debt before you apply for a mortgage. This is similar to how people do credit repair services for a few months or even a year before applying for a loan.

Luckily, resolving your tax liability is usually a bit faster, but you should reach out for professional help. A tax pro can help you find the best option for your situation. They can help you deal with unpaid taxes, unfiled taxes, and other tax issues.

FAQs About Buying a Home When You Have Back Taxes

Tax resolution professionals hear all kinds of questions from people who want to buy a home but have unpaid taxes. Here are some of the questions that people are asking.

Can I buy a house if I owe the IRS?

Yes, you can buy a house if you owe back taxes to the IRS. However, you may struggle to get a mortgage with good terms, and some lenders aren't willing to work with people who have unpaid IRS debt. If you are making payments on your tax debt, you're more likely to get mortgage approval than if you have a lien for back taxes.

Does owing taxes affect buying a house?

Yes, owing taxes affect buying a home. A tax lien can make it impossible to get a conventional mortgage. If you're making installment payments on your tax debt, the lender will consider that when assessing your debt-to-income ratios.

Will owing taxes affect home purchase?

Owing taxes increases your debt-to-income ratio. That makes you look like a riskier borrower. If you have unpaid state or IRS debt, you may face higher interest rates, or you may find it harder to get mortgage approval at all.

Can I get a mortgage if I owe state taxes?

Owing state taxes won't make it impossible to get a mortgage, but it will make the process harder. It's better if you are making payments on an established payment plan than if you have an outstanding tax lien that you're ignoring.

Do you have additional questions about how to get a mortgage when you have unpaid taxes? Then, consult with a mortgage broker or reach out to a tax professional. They will be able to answer your questions and help you move closer to your goal of homeownership.

Deal With Unpaid Taxes and Get a Mortgage

Want to get a mortgage? Then, you need to deal with your tax bill first. The process can be confusing, but a tax professional can help you. Use TaxCure to search for a tax professional in your local area today. A local tax pro can help you deal with IRS taxes, but they also know the ins and outs of dealing with your state revenue agency.