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Getting a home loan with tax debt

Getting a home loan with tax debt

Having a tax debt hanging over you can make getting a home loan very difficult. Not totally impossible, but more difficult than it will be for a person who isn’t carrying a burden of tax debt. On the brighter side, the type of debt owed (federal tax debt, property debt, student loans, etc.), the amount of tax debt owed, and the attitude of the taxpayer towards repayment of the debt can greatly influence the chances of being approved for a home loan.

The first thing most home lenders look out for is your ability to be able to completely pay (without defaulting) your home loan payment. But a tax debt could make that difficult, especially if it is a federal tax debt. Most home lenders will not approve your home loan application if there is a federal tax debt or other debts/ obligations hanging. This is because they are aware that the IRS has the authority to enforce the collection of debts owed to the government through the use of tax liens and levies on the properties of debtors.

Creditors do not like this, as it might lead to a loss for the home lenders in the long run because the taxpayer might be unable to resolve the home loan eventually. Therefore, home lenders view individuals with tax debts as riskier applicants and would probably prefer to go for taxpayers with a higher credit score over debtors.

Is it impossible to get a home loan when I have outstanding tax debt?

While unresolved tax debts and a low credit score are great encumbrances to a prospective homeowner, getting a home with tax debt isn’t impossible either. The chances of securing a loan for an individual with tax debt are greatly increased if they show a positive attitude towards paying off the debt and reducing the overall amount of their tax liability.

This can be done if the taxpayer is willing to work out a favorable installment payment plan with the IRS and is faithful to their tax obligations as is stated on the installment payment plan. Additionally, the taxpayer will need to demonstrate responsible financial behavior with their income. This will show the home lenders that necessary steps are being taken by that individual to pay off their tax debt and they will be convinced that they will probably be able to work around a house loan payment plan with such an individual.

Any type of debt negatively affects the chances of an applicant’s success with home lenders; however, the individual financial circumstance of the taxpayer will also contribute a lot to the decision of the home lenders. Debtors are always a risky investment and because the home lenders run a business that requires that they make a profit, so they ensure that they do thorough research on your debts and how it will affect their business, before making a decision.

Despite how disheartening this information may be, it is necessary to be honest with the home lenders about your tax debts and other necessary financial information so they can make an informed decision about whether or not to grant you the loan you seek. Additionally, being truthful about your debts and financial situation will make it possible for them to work out a suitable house loan payment arrangement with you for the home of your dreams.

The best situation for an individual trying to get a home is to be debt-free. This raises the chances of getting a home loan significantly. Therefore, a taxpayer with back taxes that need to be paid off should first try to work on paying off the tax debts completely to raise their credit score and reduce their debt-income-ratio, before applying for a home loan.

If possible, the tax debt can be paid off at once. However, care should be taken not to use up much of the savings proposed to serve as a down payment for the desired house to offset tax debts. Therefore, an installment payment agreement with the IRS is more advisable to get a Win-Win situation on both the tax debt settlement and house loan payment.

If the need for a home is urgent while still owing tax debts, the taxpayer should work out a suitable installment payment plan or work out an offer in compromise with the IRS to reduce the debt before applying for the house loan. They, however, need to be honest with the prospective home lenders about the current tax debt situation.

They should also be able to show the home lenders valid proof of the installment payment plan with the IRS and evidence of making at least a 3-month installment payment faithfully towards settling the tax debt. The taxpayer will also need to prove that their level of financial responsibility is enough to deserve being approved for the home loan.

It is also advisable for the taxpayer to look for a home lender that will give a more suitable deal and a lower interest rate on their desired home. This will significantly reduce the amount in monthly payments required for the home loan and make it easier to pay back the installment payment plan for the tax debt.

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Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties, of any kind, under U.S. federal tax laws.