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Mortgage approval & back taxes

When seeking pre-approval, and subsequently approval, on a mortgage:


* Do all backtaxes needed to be cleared or will the lender worry only about the most recent 2 years?
* If all, as long as a payment plan is in place, would 2010 be an issue?
* Would filing returns recently be an issue, or is the requirement 'just' that they have to be paid?
* From an approval perspective, is completely paid off a year's back taxes better than an installment agreement, or does it not make a difference?


Thanks.

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July 21 2013 - San Francisco
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Lenders will not give a loan pre-approval to someone who has back taxes outstanding. You can talk to a loan officer at 2 local banks to determine when you can qualify for a loan pre-approval after your taxes are paid.
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July 21 2013
Are you referring to property taxes or income taxes? If income taxes are you referring to Federal or State?

Please let me know and I'll do my best to answer your questions. 

Sincerely,
Greg
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July 21 2013
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sorry, federal income. 

looks like not all of my original message posted for some reason.  in short, the situation is:

2012 filed, nothing owed
2011 about to file late, will owe $7-8k and will pay in full
2010 about to file and will go into payment plan for the approx $4k

From a lenders perspective, is a (direct debit setup) payment plan acceptable or is it a blocker?  Will there be any issue with late taxes but paid in full?

our situation in summary:

both of us are w2
combined annual income of about $380k from (w2 verified)
house value of about $600k with about $150k down
one great credit, one fair
not a lot of other debt between us
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July 21 2013
Are federal taxes in  lien status? If the fed is unpaid I assume the state is on their heels. If 2010 is unpaid, here is the problem- the state and fed would lien any house you own. State Franchise Tax is happy to tow your car away or take anything to pay the debt.
Does it show on your credit?
When they run a 4506T all the details will show.
Have you filed 2011 and 2012?

Pay the taxes first then think about purchasing.
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July 21 2013
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State is all paid up.  The years in question are the ones listed and it's federal. and there's nothing on my credit.  thx
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July 21 2013
I think you are OK. Once you have chosen a lender and they have run your approval it will tell them how many year's tax returns will be required. Sometimes it is only one. If it is only one and your 2012 is filed and accepted by the IRS it might be as easy as that. 

Also it is RARE for a lender to ever need more than two year's returns, so if you wait until 2011 is filed and paid that should cover it also. As it is most likely you will only need to provide 2011 and 2012 returns.

If that RARE case did come up for some reason IRS approved payment plans are acceptable. The lender will usually want to see a payment history on the payment plan, usually six months of on time payments at least. 

If any of this has become a tax lien all bets are off. They'll have to be addressed (although the six months into a payment plan with the IRS thing mentioned above may work even if it is already a lien).

One thing to remember is on section 8 of the Residential Loan Application you will be asked "Are you presently delinquent or in default on any Federal debt or any other loan, mortgage, financial obligation bond, or loan guarantee?" and you may have to answer yes to this question depending on the status of your 2010 and 2011 federal taxes at the time of application. My opinion is you would not be delinquent or in default if your 2011 is paid in full and you have an agreement with the IRS to pay the 2010 taxes set up, but I am not an attorney so please do not take that as legal advice. 

Hope that information helps.

Sincerely,
Greg
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July 22 2013
From my perspective: 
Property taxes will need paid current at the time of closing. However, I think you are only referring to federal income tax returns since you mention "being filed". The only way a lender will close is if you've filed and if you have paid for the last two years. Yes too like Greg mentioned if the last two are filed then we would only request tax transcripts on those years. However, when you answer yes to the declaration question (saying you have outstanding federal debt) so long as you can prove you have a verified payment plan AND can prove that a lender is not in jeopardy of first lien position then you should be ok. It will depend on your entire overall financial profile and whether or not the automated underwriting findings come back with a favorable decision. 

I am licensed in the State of Ohio only but no one had mentioned getting something from the IRS that they won't file a judgment and will not threaten a lender's first lien position. 

Best of luck to you,
Kim Lawson, Ohio licensed mortgage loan originator. Contact and licensing information can be found on my profile.
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July 22 2013
See IRS Publication 785
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July 23 2013
 
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