Federal Tax Debt and Your Mortgage

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Federal Tax Debt and Your Mortgage
Federal Tax Debt and Your Mortgage

April 15th seems to come faster every year!  For those who get a refund at tax time is almost like a 2nd Christmas!  However, for those that owe Uncle Sam and the IRS federal taxes April 15th has a bit more of a sting to it.  While the IRS can be very accommodating setting up payment plans for those who do still owe Federal taxes your Arizona mortgage lender is not so forgiving.

When applying for a home loan, your lender will verify if a loan applicant has any outstanding Federal tax debt.  Why?  The IRS is the one entity that can place a lien against an individual that supersedes a mortgage lender’s lien.  That means if a borrower forecloses on their home, the IRS would receive money before that borrower’s mortgage company does.  Not a situation any Arizona mortgage lender would want to be in.

Federal Tax Debt Must be Paid

No lender holding a primary mortgage wants to be in 2nd place behind Uncle Sam.  Your mortgage lender must make sure there are no outstanding tax liens on your credit before issuing a loan approval.  You cannot have outstanding federal tax debt and receive a loan approval.  Federal tax debt MUST be paid off OR a you must have a well established payment plan in place (depends on mortgage type) to qualify for a new mortgage.

An underwriter will look at a borrower’s credit report to see if they have any outstanding tax liens.  However, in addition to that, a mortgage underwriter will also look at a borrower’s most recent Federal Tax return.  They have to review tax returns to see if a borrower owed the government taxes or received a refund.  If federal taxes are owed for the previous tax year there must be proof the tax debt was paid, or it must be paid prior to closing.

This all only applies to Federal tax debt and NOT to state taxes.  Make sure to keep an eye out for this when applying for a loan.  This can be a nasty surprise that derails a mortgage application last-minute if missed by your loan officer.

By Jeremy House

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