While owning a home is a goal for many people, owing taxes to the IRS can make it difficult to approve a conventional mortgage. Lenders thoroughly examine their debt-to-income (DTI) ratio and tax liabilities affect it negatively. Having a tax debt, also called back taxes, won't stop you from qualifying for a mortgage. If you owe back taxes to the IRS, you may have heard of levies and levies.
Although they are often clustered together, they are not the same thing. While a lien secures the IRS's interest in your property, it doesn't keep the asset. A garnishment, on the other hand, occurs when the IRS seizes your property and sells it to recover your outstanding taxes. Your outstanding taxes, regardless of the form they take, can affect your mortgage payments.
When lenders assess your creditworthiness, they consider your risk as borrowers in general. If you have a large amount of unpaid taxes, you're likely to face a higher interest rate. Tax levies tend to increase their risk profile for most mortgage actuaries. Frankly, the best solution is to pay any garnishments before buying a new property.
If you're looking to get a mortgage and have an outstanding tax debt, the worst thing you can do is ignore it. When a landlord fails to pay the required property taxes on a home, the government can establish a home lien as a method of collecting the tax debt. In addition to your debtor's jurisdiction, the IRS and state officials also have different mechanisms for collecting taxes due that may affect your mortgage. Since the seller will be required to pay capital gains tax on the profits from the sale, you must declare the sale and, usually, as soon as it is complete.
You can get approved for an FHA loan or a VA loan with back taxes, but you'll have to meet certain conditions first. One of the main questions a lender asks buyers is to report any outstanding tax or debt issues as part of the approval process. If you're having trouble getting a conventional home loan because of a tax debt, you can apply for an FHA loan. FHA loans depend on factors such as income and credit history, even before considering tax issues.
While it's true that you probably won't be approved for a home loan if you haven't taken any steps to resolve your tax debt, showing evidence that you're working to achieve a tax resolution can provide you with a practical solution. If you haven't taken any steps to resolve a tax debt, you probably won't be approved for a mortgage. If you don't pay your taxes on time after the IRS has assessed your tax liability and sent you a notice and a request for payment, the lien will apply to your property. Jo Willetts, director of tax resources at Jackson Hewitt, has more than 25 years of experience in the tax industry.
This makes it easier to work with them if you owe taxes and are less risky from a potential lender's perspective. The type of mortgage you want will also significantly affect how back taxes could affect your eligibility.