To a certain level, mortgage lenders do not view debt as a no-go on offering you a home loan. Collections and judgments from private entities hurt, but nothing hurts as bad as owing the government unpaid funds. Even if the debtor is the federal government, though, it doesn’t automatically disqualify you from seeking a mortgage. It just makes it more complicated and requires some extra financial diligence on your part.
How Complicated Is Obtaining A Mortgage If I Owe The IRS?
The IRS has several options in their arsenal to collect unpaid taxes, including placing liens on real estate and bank accounts assets should you fail to respond to their official notice within 10 days. These show up in your credit report, often even after bankruptcy.
Federal debt is particularly problematic if you’re seeking a government-backed mortgage, such as a VA or FHA loan. While it also sets warning bells a ringing for private lenders, it doesn’t make it impossible to get a loan so long as your taking the appropriate steps to rid yourself of the lien.
The bottom line is that it’s complicated to obtain a loan with or after a federal lien, but not impossible.
Extra Hurdles Are Involved In Getting A Mortgage For Borrowers With A Federal Lien
Of course, it’s ideal to pay off the lien before applying for a mortgage. That’s not always possible, however. Now, the question for the lender becomes of effort. What are you, the borrower, doing to honor the debt? What level of effort is expected will depend on the type of loan being sought. Another big consideration is how that effort impacts your debt to income ratio.
Veterans or military personnel trying to get a VA mortgage approval, for example, would face proving they have an acceptable IRS repayment plan, have timely honored the repayment plan for at least a year, a satisfactory debt to income ratio, and honestly disclosed the existence of the lien on the loan application.
Automated underwriting can be problematic for any type of mortgage loan involving a borrower with a lien. Lenders, if they’re willing, can use manual underwriting to get around the issue. This involves a more in-depth assessment of your financials and more stringent requirements than traditional underwriting, including requiring a much lower debt to income ratio.
What Can I Do To Improve My Chances Of Getting A Mortgage As A Borrower With A Federal Lien?
•Pay off the lien as soon as possible.
•Show good faith that you’re making consistent, timely, and full payments to rectify the federal IRS debt.
•Keep your debt to income ratio as low as possible, meaning avoid depleting your purchasing power by creating more debts and utilizing credit limits.
•Ensure that all other debts are paid timely and in full & routinely monitor your credit reports.
While not impossible, obtaining a mortgage as a borrower with a lien on their financial records means that you’ll have to take an active role in jumping across a significant amount of extra hurdles to satisfy a mortgage lender.