Can You Buy a House if You Owe Taxes?

In a Nutshell

• Yes, you might be able to get a home loan even if you owe taxes.
• Owing taxes or having a tax lien does make it harder and more complicated to get a mortgage.
• You can improve your chances of mortgage approval by actively working to resolve your tax debt even if you can’t pay it all off immediately.

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Failing to pay your federal income taxes can lead to the Internal Revenue Service placing a lien on your property or your assets. These legal tools protect the government’s ability to get its money. They also set off alarm bells for lenders. It can be tricky, but not impossible, to buy a home if you have a lien due to unpaid taxes.

The good news is that federal tax debt—or even a tax lien—doesn’t automatically ruin your chances of being approved for a mortgage. But you do usually have to take steps to resolve the issue before a lender will look at your mortgage application favorably.

In This Piece

• How Does a Tax Lien Affect Buying a House
• Can You Get an FHA Loan if You Owe Back Taxes
• Can Military Borrowers with a Tax Lien Get a Home Loan
• Can You Get a Mortgage if You Didn’t File a Tax Return
• Can You Buy a Home if You Owe Other Types of Tax Debt
• Research and Preparation for Buying a Home

How Does a Tax Lien Affect Buying a House?

Having a tax lien will generally make your home buying journey a bit harder—though it depends on the type of tax lien you’re dealing with. Depending on your situation, you may be able to buy a house while you owe taxes. But you may have to actively work on the tax debt before a bank will approve a home loan.

If you want to avoid the issue altogether, it might be best to pay off tax liens before you fill out a loan application. But if that’s not something you’re able to do, you still might be able to forge ahead, provided you’ve actually tried to make a dent in that debt.

The specific details of your situation come into play, though. And lenders typically have slightly different requirements and documentation needs, so you’ll need to work closely with your bank or mortgage lender. If you know you have tax debt you can’t pay immediately, be honest about it so the lender can let you know what you may need to accomplish to be approved for a home loan.

Can You Get an FHA Loan if You Owe Back Taxes?

You may be able to get an FHA loan even if you owe tax debt. But you may need to go through a manual underwriting process to make this happen. During this process, the lender looks for proof that you have a valid agreement to repay the IRS. It also requires that you have made on-time payments on this agreement for at least the last three months.

FHA loans aren’t only contingent upon your tax debt status. You’ll also have to meet any other requirements, including those related to income and credit history. And your tax debt may change those figures.

For example, Fannie Mae rules require underwriters to include your monthly payments to the IRS as part of a payment agreement in your expenses. The more you’re paying the IRS, the less disposable money you have. That can impact how much home you’re able to get a loan for or how much of a down payment you may need to come up with. 

Can Military Borrowers with a Tax Lien Get a Home Loan?

Lenders can view liens differently depending on the loan type and other factors. But in general, military borrowers with a tax lien may be able to obtain VA mortgage preapproval if the following conditions are met:

• They have an acceptable repayment plan with the IRS and have made on-time payments for at least the last 12 consecutive months.
• They can satisfy all debt-to-income ratio requirements with that monthly tax repayment included.
• They note their outstanding tax lien on the loan application.

Can You Get a Mortgage if You Didn’t File a Tax Return?

Not filing a tax return at all is different from filing one and still owing taxes. The IRS actually charges more in penalties for not filing than it does in interest for paying taxes late. Failing to file can be a fairly serious financial mistake.

And without tax returns that you filed, many mortgage companies won’t consider your application. Tax returns are a common required document for the mortgage approval process because they help document your income.

Can You Buy a Home if You Owe Other Types of Tax Debt?

If you owe state taxes or property taxes, you could also put your dreams for homeownership at risk. The rules vary slightly for each situation, but any type of debt you owe can cause your lender to consider you a higher-risk applicant. Even if you’re approved for the mortgage, your interest rate may be higher.

The best bet with any type of tax debt is to pay it off as quickly as possible. And if you can’t resolve it before you apply for a mortgage, at least reach out to the agency you owe to make arrangements.

Research and Preparation for Buying a Home

Whether you want to buy a home while you owe federal taxes or you’re certain your credit report is squeaky clean, take time to prepare before applying for a mortgage. You may be surprised by an error or negative item on your credit report, for example. It’s better to fix credit issues before you try to buy a home than be surprised by them during the process.

Keep in mind that federal taxes have due process, but state taxes don’t. That means you have options for questioning federal taxes and making arrangements for paying them. That may or may not be the case in your state, so it’s important to stay up-to-date on what you owe and to which agency. 

After taking steps to pay off or make timely payments on your federal taxes and handle any state or local tax issues, check your credit reports. Then, use your score and other information to find out what types of mortgage rates you might qualify for. This helps you understand whether or not it’s the right time to apply for a loan and buy a new home.

The Bottom Line on Buying a Home When You Have Tax Debt

If you’re a prospective homebuyer with a tax lien, a good first step is making sure your track record shows at least a year’s worth of on-time payments. Pay it off in full if possible, but if that’s a tall order, know that you might have diminished purchasing power and a rockier road until the slate is clean.

In the meantime, you should also be keeping tabs on your overall financial progress by checking your credit reports regularly. You can get these reports free once a year from each of the three major credit reporting agencies, and you can get your free Experian VantageScore 3.0 from Credit.com.

Monitor your credit scores for increases or drops. Taking an active role in your credit can help you get on track to buy a home, especially when you’re facing certain financial hurdles such as a tax lien.

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