Not being able to pay your taxes is a big deal, but luckily, the IRS provides a way to make it right. The tax lien payment plan allows consumers to get caught up on their back taxes. Does this debt affect your ability to buy a home, though?
We take a look below as the situations differ depending on the loan program.
Most Programs Allow the IRS Payment Plan
The good news is that you can get almost any type of loan even with an IRS payment plan in place. All loan programs including Freddie Mac, FHA, USDA, and VA allow it. The one entity that does not is Fannie Mae. This is one of the largest investors in conventional loans. Fannie Mae requires that all tax liens are paid off either before or at the closing in order to secure their financing.
Don’t worry, though. If you really want a conventional loan, you can use a Freddie Mac program. The rates and fees might slightly differ, but not by much. The key with any of the programs that allow the payment plan, though, is that the payment fits into your debt ratio.
The Maximum Debt Ratios
Each loan program discussed above has different debt ratio requirements. The one area they have the same rules, however, is that the payment must be included in the debt ratio calculation.
The maximum allowed debt ratios are as follows:
- Freddie Mac loans – 36% total debt ratio
- FHA loans – 41% total debt ratio
- USDA loans – 41% total debt ratio
- VA loans – 41% total debt ratio
Your total debt ratio includes the proposed mortgage payment, the IRS payment plan payment, and any other monthly debts you have. This could include minimum credit card payments, car payments, student loans, and personal loans.
Proving a Timely Payment History
Even though there are different loan programs, they all require that you can prove a timely payment history on your IRS payment plan. Typically, proving a 12-month history suffices. You must prove that you paid the full minimum payment by the due date each month during that time. If you defaulted, you’ll have to wait until a full 12 months passes that you have on-time payments.
Because having tax debt is a serious issue, many lenders will require that you have compensating factors. These are things that can offset the risk of giving you a loan.
The most common compensating factors are:
- High credit score that goes above and beyond what the program requires. For example, FHA loans require a 580 credit score, but if you have a 700 score, you show financial responsibility and lower the lender’s risk.
- Have plenty of assets available. Most of the above programs don’t require assets, but if you have them, the lender can consider them reserves. In other words, this is money that you can use to make your mortgage payments if your income suddenly stopped.
- Have a low debt ratio. You already put the lender at risk by having a tax debt in place. The fewer other debts that you have, the better off you’ll be. This lowers your debt ratio and lowers the lender’s risk.
Each lender will judge your compensating factors for themselves. Some don’t take borrowers with tax debt at all. While others will take them if one or more of the above factors are in place.
The key to finding a mortgage when you have debt with the IRS is to shop around. Be honest with each lender you talk to. Let them know the situation so that they can accurately pre-qualify you for the loan that they have available that would fit your needs. You can then compare the interest rates, costs, and terms of the loans. The more you shop around, the more alternatives you will have at your disposal.