Can I Buy A House If I Owe The IRS? (How To Get A Mortgage Approved)

If you’re dealing with back taxes and the IRS, it’s natural to wonder how this would impact other parts of your life. One question TaxRise frequently receives is: Can I buy a house if I owe the IRS?

Taxes are complicated, but don’t worry — we deal with the jargon and tax reforms so you don’t have to. Here’s how to get approved for a mortgage despite owing back taxes.

Can I Buy A House If I Owe Taxes?

In short, yes, it’s possible to buy a house if you owe money to the IRS. There are, however, more hoops you’ll have to jump through compared to someone who doesn’t have any tax debt.

When looking at the maximum amount of home you can afford, the bank (or whomever you’re financing with) will take a look at your income-to-debt ratio. In other words, how much debt you have compared to how much you earn per year.

The higher your income-to-debt percentage is, the more risk you pose to banks. Banks want to make sure they’ll get a return on their loan, so you may get rejected for a mortgage if it’s deemed unlikely you’ll pay off the mortgage.

Also, even if you’re approved for a mortgage, there’s the issue of the interest rate. Many factors go into calculating a mortgage rate (many of which are out of your control), but the less reliable your credit score is, the higher your rate will be.

Fortunately, there are steps you can take to improve your odds of securing a mortgage on a house. At the end of the day, banks do want you to finance through them, as this is how they primarily make money. 

So, you need to assure the banks you’ll follow through with the monthly payments and are reliable. 

Let’s find out how to increase your chances of mortgage approval while in tax debt below.

Back Taxes Vs. Tax Lien

Before we dive into the steps, it’d be helpful to differentiate between a tax lien and back taxes.

When you owe back taxes, it’s first categorized as delinquent taxes. You owe money to the IRS, but the government doesn’t consider it a big deal at the moment. They assume you’ll pay eventually because the penalties and interest are compounding. In other words, the IRS presumes you’ll pay the tax balance as soon as possible to avoid the increasing debt.

A tax lien is when the government makes a legal claim against your assets due to an outstanding debt to the IRS. The next step, if nothing is done about the debt, is a levy (seizure of assets). 

Due to the nature of tax liens, it’s best to get your tax debt sorted out if you have a tax lien. You would have received a form in the mail from the IRS.

Tax liens will make you an automatic red flag every qualified lender will be sure to stay away from. 

3 Tips On How To Increase Your Chances Of Mortgage Approval When You Owe Back Taxes

Regardless if you’ve been rejected before or you’re applying for a mortgage for the first time, here are several tips on how to increase your chances of getting approved for a mortgage. 

Home buying is a serious financial decision, so it’s wise to be comprehensive.

1. Identify How Much Taxes You Owe To IRS

The first step is to determine your financial standing. How much tax debt do you have? Do you have any other debts? Are there any other important financial matters you need to be aware of?

If you’re unsure of how much tax debt you owe the IRS, check out TaxRise’s free tax consultation. Owing money to the IRS doesn’t have to ruin your chances of buying a house. 

From this quick call, you’ll be able to determine if you qualify for our services and which tax relief program will work best for your unique situation. 

We’ve helped thousands of Americans settle their tax debt and set the foundation to rebuild their financial future. Fill out this questionnaire and get started on your path to financial freedom today.

2. Prioritize Buying A House

It’s possible to buy a house if you owe the IRS but, you must be enrolled in a Fresh start Program. If the program you’re enrolled in is an installment agreement, your monthly expenses cannot exceed 45% of your paycheck.

If you’re unable to meet this requirement, then your odds of being approved for a mortgage are practically impossible. 

In this case, you must prioritize paying off your tax debt instead of buying a home. 

3. Create A Plan For Getting Rid Of Tax Debt

If you get approved for a mortgage with a fair interest rate, then that’s good! However, whether you do or don’t, you still need to take care of the tax debt.

Though you may be on an installment agreement, there are other options for tax relief. The IRS has a Fresh Start Program, a collection of several tax relief programs to help relieve or pay your tax debt. (The installment plan is one of the programs).

The Takeaway

Back taxes shouldn’t prevent you from getting approved for a mortgage on your dream home. TaxRise has helped thousands of American taxpayers just like you resolve their tax issues and erase their tax liability. 

We help advocate on your behalf to the IRS. We save you stress, time, and money — while providing you with the most optimal resolution.

Check out TaxRise’s free tax consultation. From this quick call, you’ll be able to determine if you qualify for our services and which tax relief program will work best for your unique situation. 
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