There are many different types of debt that can show up on your credit report. Perhaps the worst debt to show up when you are applying for a mortgage is a federal tax lien. When the IRS has put a lien on your home, it means that they have the first rights to the proceeds of your home; the mortgage lender does not. This puts your mortgage lender in 2nd place when it comes to having the debt paid off. This is not the situation that any lender wants to be in, which makes them very unlikely to provide a mortgage to anyone with a federal tax lien whether for a purchase or refinance.
What is a Federal Tax Lien?
First it is important to understand what a tax lien is and how it affects you. If you fail to pay the taxes that you owe the government, they will put a lien on your property, which means that they have rights to it. This prohibits you from selling your home until the debt is paid off. The only way to remove the lien completely is to pay your debt in full. Typically the government will remove the lien within 30 days of you paying the debt.
Paying your Debt
Many people are unable to pay their tax debt in full, but this does not mean that you are not able to get a mortgage. If you really want to obtain a mortgage, you will need to show that you are making a reasonable effort to get your tax lien paid. This is done by setting up a payment plan with the IRS and making timely payments. You will need to show at least 12 months of on-time payments to the IRS in order for any mortgage company to consider you for a mortgage.
Watch your Credit Report
As you make payments towards your IRS debt or if you pay it in full, you will want to make sure that your credit report reflects those payments. Typically the IRS releases a lien after the payment is made in full, but the credit report does not always show this. It will take time for your credit score to come back up after being affected by a lien, so you will want to stay on top of the credit bureaus to ensure that your accounts are reporting right in order to maximize your chances at getting a mortgage.
Subordinating the Debt
If you are truly unable to pay the IRS debt in full, you might be able to petition the IRS for a subordinate certificate. This means that the IRS will allow a mortgage to come in first place on the title to your home and the IRS will come in second. This is typically only possible when you are making payments on the debt and the payoff date is in the near future. If you have not made any attempt to pay the debt, chances are that you will not be able to receive the certificate or obtain a mortgage.
A federal tax lien does not make it impossible to get a mortgage, but it does complicate things quite a bit. Before you apply for a mortgage, it is important to determine how you are going to handle the IRS debt. If you are going to pay off the debt with the proceeds of a refinance, then the IRS will likely take a backseat to the mortgage, allowing for a subordination of the debt. If you are not going to have proceeds to pay the debt off with and you have not made any attempt to pay any portion of the debt, a subordination will not be likely and the ability for you to get a mortgage will be diminished until you satisfy the debt with the IRS and have the lien on your property released.Click to See the Latest Mortgage Rates»