Can You Buy or Refinance a House with Unpaid or Unfiled Taxes?

Couple buys house with Unpaid or Unfiled Taxes

Buying a home is among many Americans’ top financial priorities. Over the last five years, around 80% of U.S. residents say buying a home is one of their goals.

But millions of people also struggle with tax debt and heavy tax burdens each year, leaving many to wonder: can you buy a house if you owe taxes? What if you haven’t filed taxes? How does a tax lien affect buying a house? What about if you’re trying to refinance your home?

This guide walks through these questions and more so you can determine whether your home-buying goals align with your tax situation.

How Unpaid Taxes May Impact Home Purchases

Everyone has a different financial and tax situation. So, the answer to the question, “Can you buy a house if you owe the IRS?” will vary based on your unique circumstances. That’s the first point to remember.

Here are a few scenarios regarding unpaid taxes and how they may impact your ability to get a mortgage:

  • You’re a little late paying your taxes: If you missed the tax deadline to file or pay what you owe, you probably received a notice from the IRS and may have incurred penalties and interest. If you pay your tax bill now, even if it’s a little late, this shouldn’t impact your ability to buy a home.
  • You have an installment agreement: If you’ve set up a payment plan with the IRS to resolve your tax debt, this shows you’re taking the right steps forward to get everything paid off. This may be acceptable to some lenders who may work with you on a mortgage.
  • You’re unsure how to pay off your tax debt: If you’re unable to pay what you owe, and you haven’t taken any steps to address it with the IRS, this could be more concerning to lenders. Unpaid debt could eventually lead to a tax lien on your property, which would include your home. This kind of tax lien is a claim against your home until you pay your debt. The next step is a tax levy, which would allow the IRS to actually seize your property to cover what you owe. Lenders don’t want to be in this mess down the road.
  • You have a tax lien: This stage means you haven’t paid your debt and haven’t reached an agreement with the IRS. The IRS has put a claim, or lien, on your property. Mortgage lenders will have a hard time getting past this fact. The lien essentially lets lenders know that the agency is actively trying to collect a debt from you. Liens attach to existing property and new property, meaning the lien would attach to your new home, and the IRS would have the highest interest in collecting.

When a mortgage lender considers you, they’ll look at all of your debt, income, and assets. They also look at your debt-to-income ratio, which is how much income you bring in versus how much debt you have.

So, tax debt could impact their decision. Taking steps to negotiate with the IRS right away can help your chances.

But how do lenders know if you owe taxes? The tax lien will be the biggest indicator, but many lenders will also ask to see your recent tax returns, and they’ll check your credit history. Tax debt does not show up on your credit report, but liens are public information, so lenders can easily find them.

What is an FHA Loan?

The Federal Housing Administration (FHA) offers a home loan program for people with low credit scores, debt, or a challenging financial situation. The FHA insures the loan for the home, so lenders provide more accommodating terms, including more reasonable down payments. You may even be able to include closing costs as part of the loan.

Here are a few important qualifications to know for FHA loans:

  • The home must be your primary residence (not an investment property, for instance).
  • You must occupy the home within 60 days after the closing date.
  • You must get a home inspection.
  • The home must be appraised by someone with FHA approval.

If you have tax debt, an FHA loan could still allow you to get approval for a mortgage and move forward with your home purchase. Discuss this option with a tax or real estate professional before getting started.

Can You Buy a House If You Haven’t Filed Taxes?

Filing and paying your taxes are two different requirements. You may file your tax return by the deadline, but you won’t be in IRS compliance unless you also pay what you owe by the deadline. You can extend the date to file your taxes, but this doesn’t extend when you have to pay.

Failing to file your taxes can lead to steep penalties, interest accrual, and eventually legal trouble. So, it’s always important that you file your tax return accurately and on time each year.

In some cases, it may be possible to get a mortgage when you only have unfiled returns for the last year or two. Lenders will look at your financial situation and credit, and if you weren’t required to file, they may process the loan application without a tax return. However, in most cases, especially if you’re a business owner or self-employed, they will want to see your tax returns to verify your income.

But remember, not filing your tax return can lead to serious issues, so it’s never a good idea to try to get around this legal requirement. Plus, failing to file your taxes means you are probably putting off paying taxes, too.

If You Owe Taxes, Can You Refinance a House?

Another common question is whether you can refinance your home if you owe back taxes. This is usually the same scenario as getting approval for a mortgage. Lenders will examine your credit and debt situation when you apply for refinancing. Your opportunities may be more limited if you owe back taxes to the IRS.

However, other factors will impact your ability to refinance, including your debt-to-income ratio, the amount of debt you have, other types of debt, and your full credit history.

Note that if you have a tax lien, refinancing is harder. The tax lien would have priority when it comes to security interest since it came before the refinanced mortgage. So, lenders would like to avoid having a second interest to the property, under the IRS lien. In this situation, you would have to apply for a lien subordination with the IRS. If granted, the IRS federal tax lien “subordinates” and allows the new mortgage to take priority over it.

Strategies to Avoid Tax Debt

Whether you’re looking for a home or are just beginning to talk to lenders, it’s important to get your tax situation figured out so you can get approved for a mortgage. These strategies will help you avoid tax debt and tax liens so you remain a strong loan candidate:

Don’t Miss Tax Deadlines

The best way to avoid any tax debt or tax issues is to file your tax return and pay what you owe on time. Most years, the deadline is April 15 for the prior year’s taxes, unless it falls on a weekend or holiday. Do everything you can to file your return and send your payment in by this date. Otherwise, you will incur penalties and other consequences.

Respond to IRS Notices Immediately

The IRS may mail you notices when you owe more than you paid, you fail to file your return, or you provide inaccurate information. Whatever kind of notice you receive, always read it thoroughly and respond right away.

If you’re not sure how to proceed, notices usually provide contact information for someone you can reach out to. You can also talk to a tax expert about your notice. But don’t ignore it, and act quickly.

Pay Your Debt If You Can

Paying taxes is never fun, but remember that it is a requirement for nearly everyone who lives and works in this country and for U.S. citizens who live abroad. Failing to comply with IRS regulations can put you deeper into financial or even legal trouble.

When you file your taxes, try to pay what you owe upfront. Make paying taxes a priority. If you can’t afford to pay what you owe, apply for a form of tax relief and talk to a tax attorney who can help guide you through it.

Set Up a Plan with the IRS If You Can’t Pay

A common form of tax relief is an installment agreement. You can apply for this kind of payment plan, and if approved, the IRS will set up a timeline and monthly payment amount so you can pay off your debt over time.

The IRS offers both short- and long-term payment plans based on how much you owe. If you apply online, short-term plans must be paid within 180 days and can apply to balances under $100,000, and long-term plans are longer and can be applied to balances of $50,000 or less. However, if you apply through the mail or by talking directly with the IRS, you can get payment plans on much larger balances.

Be Transparent and Honest with the IRS

Many taxpayers mistakenly believe if they ignore notices and obligations, the IRS will just forget about them. Or, they think they can get away with underreporting their income to pay a lower amount in taxes.

This isn’t the case. The IRS checks reporting against the documents they receive from employers, banks, and organizations that pay you. Always provide accurate information on your tax return. Be open with the IRS if you are experiencing financial hardship that is getting in the way of your ability to pay. They will usually work with you to resolve the matter.

Disclose Everything to Lenders

When you’re applying for a mortgage, also ensure you’re transparent with lenders about your tax situation. If you have outstanding debt, explain why and what your efforts are to get it resolved. Do what you can to show lenders that you are taking steps to resolve your tax debt.

Never try to hide the fact that you have unpaid taxes from lenders. They will discover the tax debt one way or another, and being dishonest will not help your case.

Stick to a Realistic Home-Buying Budget

With or without tax debt, you may have a hard time getting lender approval if you are looking for homes outside your price range. Create a budget that factors in all of your expenses, income, assets, and debt, including tax debt.

Even if you get approval, you don’t want to get into a situation where your monthly debt payments are hindering your ability to pay your mortgage.

Wait to Purchase a Home

If you are dealing with tax debt or another tax issue, you may be better off waiting to buy a home until the matter is resolved. This way, you can be sure that your tax debt won’t hinder your mortgage approval.

Buying a home is a major financial decision, so delaying it a year or two may benefit you in the long run.

Talk to an Expert about Your Tax Situation

Dealing with tax debt or a tax lien can be a major headache, especially when you’re hoping to purchase a property. The good news is that you have options, whether you work out a deal with the IRS or go with an FHA loan.

When you’re not sure how to move forward, your best bet is to discuss your situation with a tax professional. They can walk you through how much tax debt will impact your chances of getting mortgage approval and other factors lenders look for.

The team at Wiggam Law is here to help you meet your goals. Our expert tax attorneys understand how complex taxes can be, and we can guide you through all these complications to get your tax situation resolved. Then, you can work on taking your next big life steps.

Contact Wiggam Law today to get started with a consultation.