I'm from the IRS and I'm Here to Help...
Yes, that's right. The Internal Revenue Service wants to ride in like a knight in shining armor and help some of you close your home loans. Will you be the lucky beneficiary? Let's take a look at what, on the surface, seems to be "mission impossible." The IRS is only there to impede, to take from us and to delay, right? Not always.
From time to time, there are situations where a borrower is in the mortgage process and has both the down payment requirement and a Federal tax obligation. And, as you might expect, there are situations where both cannot be met in the scheduled close of escrow timeframe. I'm going to use a hypothetical scenario to illustrate how an IRS payment plan (also known as an installment agreement) can successfully be used to eliminate a cash crunch at closing.
Let's say our borrower, Cathy, is self-employed. She would like to use the income she declares on her current tax return, however, she filed the required extension paperwork (Form 4868) because her return was not complete before April 15. On her return, she shows a balance due to the IRS of $25,000. At some point before the extension deadline (Oct. 15), Cathy finds herself in escrow on the home of her dreams. As her lender, we're using a Fannie Mae (FNMA) conforming loan program and we inform her that in order to take her most recent income into consideration, she must document that her IRS obligation ($25K) is paid before her loan funds.
Panic sets in. How to come up with both the down payment and the $25K? An IRS payment plan might do the trick.
First things first, we must confirm that there's no indication a Notice of Federal Tax Lien has been filed. Once clear of this, Cathy can contact the IRS to set up the plan. This is best done in coordination with us, as the lender, because we must factor the monthly installment payment in the debt ratio of the loan. Once Cathy has put the installment plan in place, she must make at least one payment on it. We'll document all of this for underwriting. With the information above, we are now prepared to close Cathy's loan with a single installment payment (and her required down payment and closing costs) instead of the full IRS tax obligation and the requirements of the purchase. That's quite a dramatic improvement in the situation and it comes courtesy of Uncle Sam. Who would have thought?
An IRS payment plan, as above, won't work in every case and it won't work exactly the same with either a jumbo or a government loan (FHA or VA) --- take note that these are Fannie Mae's specific guidelines pertaining to installment agreements. But if you find yourself in a situation where it's not possible to come up with the funding for both a tax obligation and the settlement costs of your home loan, give me a call and let's take a look at the possibility of using a payment plan. If it's a match, it could well turn the IRS from the villain into the savior and I'm sure, for once, they'd be OK with bolstering that reputation.
Under penalty of perjury,
Vice President of Mortgage Lending
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