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Profile picture for Dean364

Can I get approved with a federal tax lien?

I have a 740 credit score, I make over 100K/year, and can put down 20% on a 350K mortgage. My income to debt ratio is very good (high income, very low debt) Is it possible for me to get approved if I have a federal tax lien?
  • July 25 2011 - US
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Answers (16)

Profile picture for rkhatry360
I have good credit and good income. But I have a 54000 state sales tax lien which I have been fighting for 9 months. I wanted to buy a house but not sure if I can get financing
  • November 06 2014
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Profile picture for gar4rylyn
Federal tax lien under $25K can only be removed if the entire balance can be paid off in 5 years or less.
  • May 28 2014
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Profile picture for brian6739
Can you create a trust to purchase a new house on a VA loan instead of paying the whole federal lien balance......and losing all the leverage of having the money on the side for payments over time?
Thanks!
  • March 03 2014
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Profile picture for brian6739
Can you establish a trust to purchase the home, and bypass paying the whole Lien balance up front?
Thanks!
Brian
  • March 03 2014
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Dude, I think everybody below has provided great advice and I learned a ton just reading their responses.  I would pay that sucker off first before you got into debt to the turn of 300k.  I feel you brother about buying a house, and I would love to sell you one.  But you know 100k doesn't go that far anymore and you don't want the FEDs on your butt all the time.  I would pay it, get the feds off your back, and then find cool house to buy.  Good luck bro.
  • November 27 2013
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Profile picture for shannonbridgforth
Were you able to get a home? I got the same problem about $140,000 tax lien
  • November 27 2013
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You are welcome and good luck!
  • August 08 2011
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Profile picture for Dean364
Wow, thanks for all the great info. I'm in the process of doing an OIC with the IRS. However, if the OIC isn't accepted I have to do a payment plan. If I do a payment plan the amount owed is like $270K. I'd like to get on with my life while making the lowest payment possible. Believe me, I want this done and over with as quickly as possible. But if I stuck making payments for 10 years I still want to know that a new house isn't out of my reach.

Thanks again everyone!
  • August 05 2011
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Tex,  it depends on the state; in some states the tax lien automatically is subordinate to a mortgage lien.
  • July 28 2011
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If you have $70,000, why aren't you paying off your federal tax lien. Part of getting a mortgage is the willingness to pay. If you aren't willing to pay what you owe to the Feds why would the underwriter think you would pay the mortgage?
I would suggest that if you have the money to pay off your federal tax lien do it and then consi8der a FHA with 3.5% down.
  • July 28 2011
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Lame the link got removed, here is the info from it.

A lot of times lenders will not approve borrowers who have open (and sometimes even paid) IRS tax liens 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.

  • July 28 2011
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Profile picture for Texas Banker
Federal tax lien will take prior lien position to any mortgage. That lien would attach to any real property you own. You need to settle the lien or establish a trust if you want to acquire any property.
  • July 28 2011
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Are you currently making payments on the lien?  If not they will want proof the lien is released.
  • July 28 2011
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It entirely depends on what type of financing you are applying for, if you are on a payment plan, and if the payments have been made on time.  FHA/VA/USDA financing is typically OK with it... but Fannie/Freddie (conforming financing) will likely have issues.

I wrote a detailed blog article about it at

[ link removed self promotion ]

However the key point in that blog post is that the IRS is willing to withdraw tax liens for less than $25k if a Direct Deposit Installment Agreement (DDIA) is set up, and you need to prove you can make the payments on time.
  • July 25 2011
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A federal tax lien will not prevent you from getting a mortgage on its own, although its existence does make it more difficult.  Typically, the lender will want to see a payment agreement with the IRS, copies of cancelled checks, and a payment history on the agreement (usually 12 months).
  • July 25 2011
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Profile picture for blythebsanders
Unless guidelines  change, you will have to have the federal tax lien paid off. The underwriter will have to have proof that it is paid and your credit report updated. Before the market changed you would be able to obtain a new mortgage because the would be subordinated to the new purchase money note.
  • July 25 2011
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