Key Takeaways
- Possible but challenging: Can you buy a house if you owe taxes? Yes, but you’ll need either a payment plan or to settle with the IRS first
- Loan requirements vary: Different mortgage types (FHA, conventional, VA) have different rules about tax debt
- Tax liens create obstacles: Active tax liens seriously hurt your approval chances
- Payment plans are essential: Having an established IRS payment plan significantly improves your odds
- Professional help matters: Working with tax pros can resolve issues before applying
Look, buying a house is stressful enough without tax problems hanging over your head. But life happens—maybe you fell behind on taxes, or perhaps you’re dealing with an unexpected bill from the IRS. The big question is: can you buy a house if you owe taxes? The answer isn’t a simple yes or no.
The Reality of House Hunting with Tax Debt
So you wanna buy a house but you owe the taxman. Not ideal, but not impossible either. Truth is, can you buy a house if you owe taxes? Yes, but it definitely complicates things.
Banks and lenders aren’t exactly thrilled about borrowers with tax debt. They look at it and think, “Hmm, if this person can’t handle their taxes, how they gonna handle a mortgage payment?” Fair question, tbh.
The impact really depends on a few things—how much you owe, whether the IRS has slapped a lien on you, and what kinda mortgage you’re after. Some loans are more forgiving than others when it comes to tax issues.
Lenders check your tax situation in different ways. They might pull your tax transcripts, search for public records, or just straight-up ask you. So don’t think you can hide it—they’ll find out one way or another.
Which Tax Problems Hurt Your Mortgage Chances?
Not all tax issues are created equal. Some are minor speedbumps, others are massive roadblocks when you’re trying to figure out can you buy a house if you owe taxes.
Federal Tax Debt: The Big One
Federal tax debt is usually the biggest headache. The IRS doesn’t mess around, and neither do mortgage lenders when they see you owe Uncle Sam. Here’s how different situations stack up:
- Missing tax returns: Most lenders want to see at least 2 years of filed returns. No returns? No mortgage, probably.
- Owing with no payment plan: This is a red flag that’ll sink most applications
- Owing with a payment plan: Much better! Shows you’re handling the problem
- Tax liens: Major obstacle—these are public records that show you’re seriously behind
I talked to a client last month who had a $12,000 tax bill but had been making payments for 8 months. She still qualified for an FHA loan because she’d shown responsibility with her payment plan.
State and Local Tax Issues
State tax authorities might seem less scary than the IRS, but they can still cause problems. State tax liens show up just like federal ones, and they’ll raise the same red flags with lenders.
Property taxes are especially tricky since they’re tied directly to real estate. If you’re behind on property taxes, that’s gonna be a problem for any new home purchase.
What Mortgage Options Do You Have?
Different loans have different rules about tax debt. Let’s break down what options you have when considering can you buy a house if you owe taxes.
FHA Loans: Sometimes More Forgiving
FHA loans might be your best bet if you’ve got tax issues. They’re a bit more flexible, but they still have rules:
- You need an IRS payment plan with at least 3 months of payments
- Your tax payment gets counted in your debt-to-income ratio
- Active, unresolved liens are still a no-go
I worked with a family last year who got an FHA loan despite owing $8,000 to the IRS. The key was their 6-month history of on-time payments on their installment plan.
Conventional Loans: Stricter Standards
Conventional loans are typically tougher on tax debt:
- Most won’t touch an application with an active tax lien
- Some might consider you if you’ve been on a payment plan for a year or more
- The debt counts against how much you can borrow
This is why many folks with tax issues end up going the FHA route instead.
VA and USDA Loans: It Depends
If you’re eligible for VA or USDA loans, tax debt doesn’t automatically disqualify you:
- VA loans might work with a solid payment plan
- USDA loans usually want to see tax debts resolved or in a payment plan
- Both include your tax payments when calculating how much house you can afford
Payment Plans: Your Best Friend When Buying a House
Setting up a payment plan with the IRS is often the first step to mortgage approval when you’ve got tax debt. So can you buy a house if you owe taxes? With a payment plan, your chances improve dramatically.
How Payment Plans Help Your Application
When you get on an installment plan with the IRS, you’re showing lenders you’re dealing with your problems responsibly. But there are some things to know:
- Your monthly payment gets added to your debt calculations
- Lenders wanna see you’ve been making payments (usually 3-12 months)
- The actual debt still counts against you
I had a client who set up a payment plan 6 months before applying for a mortgage. That planning ahead made all the difference—she got approved because she could show a history of responsible payments.
What Documents You’ll Need
When applying with tax debt, be ready to show:
- Your approved installment agreement
- Proof you’ve been making payments on time
- Maybe a letter from the IRS showing you’re in good standing
Having these ready before you apply saves a ton of headaches later.
The Nightmare of Tax Liens
A tax lien is basically the government saying “we have a legal claim on your stuff because you haven’t paid up.” These are serious business when you’re trying to buy a house.
What Happens to Your Credit
Tax liens used to show up directly on credit reports. That’s changed recently, but lenders can still find them through public records searches. And they absolutely will look.
When a lien hits, your credit score can drop 100 points or more. That’s enough to kick you out of the good rate category into “ouch, that interest rate hurts” territory.
How Lenders Handle Liens
Most lenders get real nervous when they see tax liens:
- Many won’t approve mortgages with active liens, period
- Some might consider you if you’re on a payment plan
- Others want the lien fully resolved or subordinated
I remember a client who had a small tax lien from 5 years ago that he’d forgotten about. It wasn’t even on his credit report, but it showed up in the title search and nearly killed his whole deal at the last minute.
What to Do Before Applying for a Mortgage
If you’ve got tax debt but want to buy a home, here’s what to do when wondering can you buy a house if you owe taxes:
1. File Your Missing Returns
First things first—file any missing tax returns. Lenders hate missing returns even more than they hate tax debt. At least 2-3 years of returns are usually required.
2. Get on a Payment Plan
Call the IRS and set up an installment agreement. This shows lenders you’re handling your business responsibly.
3. Make Your Payments Religiously
Don’t miss a single payment on your tax debt. Lenders will check your payment history, and one missed payment can restart the clock.
4. Pay It Off If Possible
If you can scrape together the cash to pay off your tax debt before applying, do it. Some folks use personal loans or borrow from family to clear tax issues before house hunting.
5. Ask About Subordination
If you can’t pay off a tax lien, sometimes the IRS will “subordinate” their claim—basically putting it behind your new mortgage in priority. This can help in some cases.
I worked with a guy last year who used his year-end bonus to pay off a $4,000 tax debt before applying. Smart move—he got approved without any extra hassle.
Getting Professional Help
Tax problems get complicated fast. Sometimes you need a pro in your corner.
When You Need a Tax Attorney
Consider getting a tax attorney if:
- You owe big money to the IRS
- You’ve got a tax lien complicating things
- You need to negotiate with the IRS
- You’re confused about how to fix your tax situation
A good tax attorney isn’t cheap, but neither is losing your dream home because of tax issues.
Working with Financial Advisors
Beyond legal help, financial advisors can suggest strategies like:
- Restructuring other debts to free up cash for tax payments
- Setting up savings plans to resolve tax issues faster
- Finding ways to prevent future tax problems
Questions People Actually Ask
Can I get a mortgage if I owe back taxes?
Yeah, it’s possible, but you’ll usually need a payment plan with several months of on-time payments under your belt. Different loans have different rules about this.
How do lenders find out about tax debt?
They’re pretty thorough—they check tax transcripts, credit reports, public records, and title searches. They might even verify directly with the IRS. Don’t try to hide it; they’ll find out.
Will owing taxes wreck my credit score?
The credit bureaus don’t include tax liens on reports anymore, but significant tax debt can still hurt your finances overall, which impacts your credit indirectly.
Can the IRS take my house if I have a mortgage?
They can put a lien on it, but they rarely force a sale unless it’s a severe case. The mortgage lender usually has priority over the IRS anyway.
Can I use an FHA loan if I owe the IRS?
Maybe. You’ll need an established payment plan with at least three months of consistent payments. That payment gets counted in your debt calculations.
Does tax debt mess up mortgage applications?
Yep, it affects your debt-to-income ratio, potentially hurts your credit, and makes lenders worry about your financial responsibility. But having a payment plan definitely helps your case.
For more info on handling tax issues, check out our guides on Tax Loopholes for Small Business or When to Hire a Tax Attorney.