Many people will want to move onto the property market at some point in their lives. While renting can be a good way to live, it’s not something you want to do forever.
Houses are the more long-term answer, though it can be very difficult for many people to get up to the point where they can purchase one.
However, you may be wondering if you can buy a house when you owe taxes.
In our informative guide below, you’ll find the answers.
Can You Buy A House If You Owe Taxes?
We’ll begin by answering your key question: yes, you can sometimes get the loan that you need to buy a home even if you have a tax debt and owe taxes.
However, this won’t always be the case, and owing tax certainly makes it a lot more difficult to secure a mortgage loan.
It’s worth noting that even just improving your tax debt a little bit will be a good sign to loan lenders, so it is a good idea to try to pay off as much of the tax that you owe as you can, even if you can’t settle the tax debt completely at that moment.
What Is A Tax Debt?
Owing taxes means that you have a tax debt, which is also known as a “tax lien”. This happens any time that you do not pay the full tax balance that has been stated on tax returns before the due date deadline.
This gives you a tax debt, which can even have interest piled onto it, as well as penalties – just like when you take out a loan.
The Internal Revenue Service (IRS) is the organization that handles and collects your taxes, and the tax debt or tax lien will be with them.
If you don’t pay off the debt or the interests on it, then the IRS will send you increasingly urgent letters requesting that you do.
If you don’t respond, then they can start enforced collection. This takes the form of levying (seizing) your wages or bank accounts, among other steps.
How Do Tax Debts Affect House Buying?
As we’ve suggested, owing taxes makes it more difficult to buy a house than when you don’t owe anything, because the mortgage lenders understandably won’t want to put up their money when there is debt to be paid off.
However, it depends on the type of debt that you have. With that being said, different mortgage loan lenders have different requirements, and will want different action and documentation from you.
It is a good idea to pay off your debt before applying for a mortgage, but if you understandably can’t do this, then pay off some at least – otherwise the lenders won’t look favorably on you.
Always tell the lenders the truth, though, because you will want to work closely with them in order to meet their alternative requirements for securing the loan.
Can You Get An FHA Loan If You Owe Taxes?
An FHA loan is a home mortgage loan from the Federal Housing Administration. These are issued by either a bank or a lender that has been approved by the agency, and the loan is insured by the government.
The reason for their existence is that they help people on lower incomes and credit scores to secure a loan for a house. They require a lower minimum down payment than the other typical loans you would get for buying a house, too.
If you owe taxes, you may be able to secure an FHA loan, but you might have to undertake a manual underwriting process where the lender will examine proof that you have a real, valid agreement to pay the IRS back.
On top of that, you will need to have made those individual repayments by the correct date every time for the past three months.
If these requirements weren’t enough, you also need to meet the standards on credit history and income. This may seem alright, but tax lien can alter those statistics, so be aware.
Can You Get A Loan If You Owe Other Tax Debts?
There are other types of tax debt that you may owe which could reduce your chances of securing a loan and buying a house.
For example, you may owe property taxes or state taxes. Each situation will change your chances, but none of them look good to a lender and should be paid off as soon as possible.
Can You Get A Loan If You Didn’t File A Tax Return?
Failing to file your tax return is actually even worse than owing taxes, and you will be charged more than if you were filing but paying late instead.
On top of that, mortgage lenders will want to see your tax returns when they consider you. Without them, they’ll turn you down.
They need tax returns because the tax documents show your income, and a lender wants to confirm the income because they want to know that you’ll be able to pay off their loan over time. If you can’t, they won’t risk giving you the loan.
Can You Get A Loan If You’re A Military Borrower Owing Taxes?
Military borrowers are active duty servicemen who can enjoy special protections and lending because of their line of duty.
If you’re one and have tax debts, you may be able to get a loan if you meet conditions: you make on-time payments for the past 12 months and have an acceptable repayment plan, all debt-to-income ratio requirements with that monthly repayment are satisfied, and the tax debt is noted on documents.
Always pay off as much of the tax debt as you can, because it will improve your chances of securing the loan.