From Guest Blogger Shane Milne
Getting a Mortgage with an IRS Tax Lien
A lot of times lenders will not approve borrowers who have open (and sometimes even paid) IRS tax liens, or will require IRS tax liens to be paid in full at closing as a condition of loan approval.
With FHA financing, the FHA/HUD doesn't require IRS tax liens to be paid unless there is information that the IRS has required to be in first lien position (which is what any lenders concern is, not being on first lien position on title). However, if there have been regular and timely payments on the tax lien (most lenders require a 12 month history) and the IRS is willing to subordinate to the new mortgage (see FHA guidance below), the tax lien can remain open. A copy of repayment agreement is needed to include the payments in the debt ratio, a payment history is needed to confirm the payments have been timely, and often the lender will require a title insurance binder be provided indicating no exception to subordinated tax lien. VA & USDA follow the same.
As a rule of thumb, with Fannie Mae & Freddie Mac financing, delinquent credit, including taxes, judgments, tax liens, mechanics' or material-men's liens and liens that have the potential to affect Fannie Mae's lien position or diminish the borrower's equity, must be paid off at or prior to closing. While rarely will exceptions be made for judgments which are on an established payment, in the past 5 years I have not heard of lenders making exceptions to anything else in the aforementioned sentence (back in 2005 I had a client once get away with not having to pay a state tax lien in conjunction with Fannie Mae financing).
However people with IRS tax liens who want to purchase a home are not always fortunate enough to have FHA, VA or USDA financing as options, as well as have a lender willing to not require the IRS tax lien to be paid in full, so the IRS tax lien will have to be dealt with.
Good news from the IRS, as in the end of February 2011 they announced efforts to help taxpayers with changes to their lien process. The IRS is increasing the dollar amount threshold at which a lien is generally filed, significantly they say, to keep up with inflationary changes. After the tax bill is paid, tax liens are being withdrawn upon request of the taxpayer. The Offer in Compromise (OIC) program eligibility limits are being expanded, doubling the maximum allowed tax liability limit, and increasing annual income limits to $100,000. IRS is making installment agreements available to more small businesses.
But the biggest announcement in relation to mortgage financing in my opinion, is that the IRS is willing to withdraw tax liens for taxpayers who owe $25,000 or less in tax liability, if a Direct Deposit Installment Agreement (DDIA) is set up. So this means you can start one up now, convert your existing installment agreement into a direct debit one, or if you are already in one then just call up and make a request to withdraw the tax lien. Of course it's not instant in all situations as the IRS wants to make sure that payments will be honored so there is an initial probationary period.
In practicality, this means someone who has an IRS tax lien can improve their creditworthiness to a mortgage lender by opting to go into the DDIA and eventually having the IRS withdraw their tax lien. It doesn't guarantee that someone who couldn't get approved before will now be approved, but it is a huge step in the right direction.
Shane Milne
Senior Loan Officer
Phone: 949-273-4161
Cell: 949-322-3616
Fax: 949-231-1448
NMLS License #81195
Reference materials:
IRS Announcement: http://www.irs.gov/newsroom/article/0,,id=236540,00.html
Setting up an Installment Agreement: http://www.irs.gov/taxpros/article/0,,id=99090,00.html
IRS collection procedures for liens (has info on when they will subordinate): http://www.irs.gov/irm/part5/irm_05-012-003-cont01.html
IRS specific information on liens when purchasing a home: http://www.irs.gov/pub/irs-pdf/p785.pdf
FHA's acknowledgment of IRS tax liens typically subordinating to mortgage debt: http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.A.2.h
FHA's stance on Delinquent Federal Debt, particularly when CAIVRS hits come up (note that just simply tax liens require a subordination agreement/literature): http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.A.2.f
Fannie Mae's stance on liens/anything that would endanger their first lien position: https://www.efanniemae.com/sf/technology/ou/du/pdf/ducollectionspayoffqa.pdf
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