The government can legally take your property if you don’t pay your taxes. This is called a federal tax lien. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A federal tax lien exists after:
When the IRS files the Notice of Federal Tax Lien, it lets creditors know that the government has a legal right to your property. For more information, refer to Publication 594, The IRS Collection Process PDF.
Having a federal tax lien on your property can make getting a mortgage more difficult, but it is still possible in many cases. An IRS lien gives the government a legal claim to your property, which must be satisfied before you can sell or refinance your home. However, with the right steps, you may be able to qualify for a mortgage and buy a house even with outstanding tax debt.
What Is an IRS Lien and How Does It Affect Buying a House?
An IRS lien arises when you fail to fully pay your owed taxes. After sending notices, the IRS can file a public Notice of Federal Tax Lien. This serves as a public record that the government has a right to your property, taking priority over other creditors.
The lien attaches to all your property, including your home. If you later try to sell or refinance the home the IRS lien must be dealt with first before the proceeds can go to the mortgage lender. This extra hurdle makes getting a mortgage more difficult.
Lenders will find out about an existing IRS lien during the mortgage process through a title search or other public records check. You are also responsible for disclosing any tax debts upfront when applying for a loan. Failing to do so constitutes mortgage fraud.
Setting Up an IRS Payment Plan
The key step to buying a house with IRS debt is entering into a payment plan, also called an installment agreement. Setting up a monthly payment schedule shows lenders you are addressing the tax liability. It can also help prevent the IRS from filing a public lien or remove an existing lien in some cases.
You can apply for IRS payment plans online if you owe under $50,000. Short-term plans give you up to 180 days to pay in full, while long-term plans allow 3-6 years to pay through monthly installments You may owe setup fees and interest.
Qualifying for a Mortgage with IRS Debt
Many mortgage programs allow borrowing with an IRS payment plan, but have stricter policies if a tax lien is filed. Common requirements include:
- Being up-to-date on installment payments
- Making a minimum number of payments (often 3-12 months’ worth)
- Meeting debt-to-income limits with the payment added
- Providing proof the IRS approved your payment plan
Programs like FHA, VA, and USDA loans are often more lien-friendly than conventional loans. However, you may need to go through manual underwriting.
If you can’t qualify for a mortgage with a tax lien, you may be able to take out a separate loan to pay off the IRS first. This removes the lien prior to applying for the mortgage
Strategies for Buying a House with IRS Debt
Here are some top tips for successfully buying a home if you have IRS tax debt:
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Enter into a monthly payment plan. This shows lenders you’re addressing the debt and may help avoid a lien being filed.
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Research lien-friendly mortgage programs. Options like government-backed loans are more open to borrowing with tax debt.
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Talk to lenders upfront. Don’t hide IRS debt later in the process. They can advise if they have products to help your situation.
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Take out a separate loan for paying off a lien, if needed to qualify for the mortgage.
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Ask the IRS to discharge or subordinate a lien if it completely blocks you from borrowing.
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Get pre-approved first. This helps you know what you can afford with the payment added to your debts.
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Work quickly if buying a new home before selling the old one. You may only have a short window before the lien must be paid off from sale proceeds.
Refinancing Your Mortgage with an IRS Lien
Refinancing with an existing IRS lien on your home is more challenging than buying a new home. Many lenders will not refinance mortgages with open tax liens.
One option is to ask the IRS to make your lien secondary to the mortgage lender’s lien. This subordination request allows you to do a cash-out refinance, taking some equity to pay down your tax debt.
You can also refinance first with a lender that will work with IRS debt, then use the money from the refinance to pay off the lien right away. This takes away the main obstacle before the new home loan closing.
Should I Pay Off a Lien Completely Before Buying?
Before you buy a house, it’s best to be able to fully pay off your IRS debt. But getting on an IRS payment plan is often enough to get a mortgage approved.
It depends on your specific financial situation, the programs you qualify for, and whether the IRS has filed a public lien yet. Sometimes paying off the debt entirely may not even be possible.
You may be able to buy a house even though you still owe money to the IRS as long as you deal with the debt responsibly, tell the lender everything up front, and look into your lender options.
Weighing the Pros and Cons of Buying a House with IRS Debt
Potential advantages:
- Building equity and tax deductions through homeownership
- Accessing mortgage programs open to borrowers with IRS debt
- Removing the lien through refinancing after buying
- Taking out a separate loan to quickly pay off the lien
Potential disadvantages:
- Higher mortgage rates and payments with debt added
- Difficulty qualifying without paying off lien first
- Less cash available for down payment and closing costs
- Limitations on selling/refinancing until IRS debt satisfied
- Potential for lien foreclosure if payments not maintained
Key Takeaways
- An IRS tax lien complicates but doesn’t necessarily prohibit mortgage approval, especially with a payment plan.
- Keep accounts current, meet program guidelines, and fully disclose debts to lenders.
- Explore lien-friendly government-backed mortgages or portfolio loan options.
- Preforeclosure on a lien is rare with an on-time installment agreement.
- Paying off IRS debt entirely is ideal but is not always required to buy a home.
Buying a house when you have IRS tax debt requires extra planning but can be achieved. Seek professional advice, explore available mortgage programs, discuss options with lenders, and responsibly manage repayment of your tax liability. This will put you in the best position to become a homeowner.
How to get rid of a lien
Paying your tax debt – in full – is the best way to get rid of a federal tax lien. The IRS releases your lien within 30 days after you have paid your tax debt.
When conditions are in the best interest of both the government and the taxpayer, other options for reducing the impact of a lien exist.
A “discharge” removes the lien from specific property. There are several Internal Revenue Code (IRC) provisions that determine eligibility. For more information, refer to Publication 783, Instructions on How to Apply for Certificate of Discharge From Federal Tax Lien PDF.
“Subordination” does not remove the lien but allows other creditors to move ahead of the IRS, which may make it easier to get a loan or mortgage. To determine eligibility, refer to Publication 784, Instructions on How to Apply for a Certificate of Subordination of Federal Tax Lien PDF.
A “withdrawal” removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for your property; however, you are still liable for the amount due. For eligibility, refer to Form 12277, Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien (Internal Revenue Code Section 6323(j)) PDF.
Two additional Withdrawal options resulted from the Commissioner’s 2011 Fresh Start initiative.
One option may allow withdrawal of your Notice of Federal Tax Lien after the lien’s release. General eligibility includes:
Your tax liability has been satisfied and your lien has been released; and also:
- You are in compliance for the past three years in filing – all individual returns, business returns, and information returns;
- You are current on your estimated tax payments and federal tax deposits, as applicable.
The other option may allow withdrawal of your Notice of Federal Tax Lien if you have entered in or converted your regular installment agreement to a Direct Debit installment agreement. General eligibility includes:
- You are a qualifying taxpayer (i.e. individuals, businesses with income tax liability only, and out of business entities with any type of tax debt)
- You owe $25,000 or less (If you owe more than $25,000, you may pay down the balance to $25,000 prior to requesting withdrawal of the Notice of Federal Tax Lien)
- Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier
- You are in full compliance with other filing and payment requirements
- You have made three consecutive direct debit payments
- You can’t have defaulted on your current, or any previous, Direct Debit Installment agreement.
The Truth About Tax Lien Investing
FAQ
Does owing the IRS affect buying a house?
A tax lien can cause a significant drop in your credit scores, making it harder for you to secure favorable mortgage loans. Additionally, if a tax lien is filed against you, it’s public information and will appear on your credit reports, making it known to potential lenders that you have unpaid taxes.
Can you buy a house if you have an IRS tax lien?
A tax lien therefore means the IRS would have first dibs on your property if you were to default on your loan. This is a big risk for mortgage lenders because they would not be able to get their money back. As a result, most lenders will not approve a mortgage if an active tax lien is in place.
Can you sell a house with an IRS lien on it?
If there is a federal tax lien on your home, you must satisfy the lien before you can sell or refinance your home. There are a number of options to satisfy the tax lien.
How long does an IRS lien stay on your house?
The IRS generally has 10 years – from the date your tax was assessed – to collect the tax and any associated penalties and interest from you. This time period is called the Collection Statute Expiration Date (CSED).