Buying a House with Back Taxes: Mortgage Approval Guide

Overview

Owing back taxes complicates—but doesn’t automatically block—mortgage approval. Lenders mainly care about structured repayment, lien status, your debt‑to‑income ratio (DTI), and documentation. With a solid plan and the right loan type, homeownership remains achievable.

Tax Debt vs. Tax Lien

Tax Debt

Amount owed without a recorded lien. Many lenders will proceed if you’re in a formal Installment Agreement and making on‑time payments.

Tax Lien

Public claim against property. May require payoff, lien subordination/discharge, or settlement before closing.

Why Lenders Care

• Payment reliability: history of on‑time tax payments signals lower risk.
• DTI sensitivity: include IRS/state payment in monthly obligations.
• Lien priority: unresolved liens can outrank the mortgage in a default.

Common Myths (Debunked)

Myth: Automatic Denial

Reality: Case‑by‑case. Proof of structured repayment helps.

Myth: Must Pay in Full

Reality: Active agreements often suffice (especially FHA/VA).

Myth: Liens Don’t Matter

Reality: Liens usually require resolution or subordination.

Addressing Back Taxes Before You Apply

Installment Agreement

Document payments (12–24 months looks strong). Include in DTI.

Offer in Compromise

When eligible, settle for less. See OIC options.

Lien Strategy

Payoff, subordination, or certificate of discharge based on lender requirements.

Hardship? Explore Currently Not Collectible to pause collections while building mortgage readiness.

How Back Taxes Affect Approval

Credit

Liens/collections can depress scores; keep reports clean and accurate.

DTI

Add IRS payment to DTI; reduce other debts to offset.

Documentation

Keep agreements, payment receipts, notices, and correspondence ready.

Loan Types: FHA/VA vs Conventional

• FHA/VA: Often allow active tax payment plans with proof of on‑time payments.
• Conventional: Commonly require resolution of liens and stronger DTI metrics.
• Shop lenders: Underwriting tolerance varies widely—compare terms.

Steps to Improve Approval Odds

Get current on filings; start an IRS/state payment plan and make on‑time payments.
Lower DTI: pay down revolving debts; avoid new credit.
Resolve or subordinate tax liens as needed for your chosen lender.
Prepare a clean documentation packet (agreements, payments, credit letter of explanation).
Match loan type to your profile (FHA/VA if active plan; conventional if liens cleared).

FAQ

Can lenders see my tax debt?

Lenders review credit, public records, and title. While raw IRS balances may not appear on credit, tax liens, judgments, and collection actions are visible. Disclose any IRS/state installment agreements up front and provide the signed agreement plus a 12–24‑month payment history—this often turns a potential denial into an approvable file.

Can I qualify with an IRS plan?

Yes, many programs (especially FHA/VA) allow approval with an active IRS plan if you document on‑time payments and include the monthly amount in your DTI. Conventional lenders tend to be stricter and may require longer pay history or lien resolution. Avoid new delinquencies during underwriting and be ready to show recent IRS transcripts if requested.

What if my DTI is too high?

Lower revolving balances to under 30% utilization, consolidate high‑rate debt if it meaningfully reduces monthly outflow, and consider a smaller loan amount or longer term. For the IRS payment, ask about re‑amortizing to a lower monthly (if allowed). Increasing documentable income (e.g., adding a co‑borrower or seasoning stable self‑employed income) also improves DTI.

Do I need two years of tax returns?

Most lenders want two years of returns to verify income trends (especially if self‑employed). Keep returns filed and consistent with transcripts; large recent write‑offs can reduce qualifying income. Some programs accept one year for strong W‑2 borrowers, but self‑employed applicants should plan for two.

Can I buy a house that has unpaid property taxes?

Yes, but title and lender will require resolution. Unpaid taxes are typically paid at closing from seller proceeds or held in escrow. If a tax lien exists, the lienor’s priority must be addressed before the mortgage can fund.

What if there’s an IRS lien?

Work with the lender and IRS to choose the right path: payoff (lien release), subordination with Form 14134 so the mortgage takes priority, or a certificate of discharge via Form 14135 for the specific property. Your lender’s underwriting playbook will dictate which option is acceptable.

Need a Mortgage‑Ready Tax Plan?

We’ll help structure repayment, address liens, and position your application for approval.

Get Your Free Consultation

Can You Buy a House with Back Taxes?

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Valor Tax Relief Team