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What Are The FHA and Conventional Loan Guidelines on Tax Liens
I used to know this answer but what are the HUD guidelines and Fannie Mae Guidelines on qualifying for a mortgage with a federal tax lien? This would be qualifying for an FHA loan or Conventional loan with federal tax liens.
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3 Replies
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I remember a client I referred to a loan officer had a tax lien and they could qualify for an FHA loan but not conventional loan. FHA loans allow federal tax liens if the borrower has a written payment agreement with the IRS and has made three timely payments. Fannie Mae allows payment agreements with the IRS but not if the borrower was seriously delinquent where it turned out to be a tax lien. Getting approved for a mortgage with a federal tax lien can be challenging, but it is possible under certain circumstances. Here are some key points to consider: Outstanding tax debt: Lenders typically want to see that any outstanding federal tax debt is being resolved through an approved payment plan or installment agreement with the IRS. Simply having an unpaid tax lien can make it difficult to qualify for a mortgage.
- Payment history: If you have an approved payment plan or installment agreement with the IRS, lenders will want to see a consistent and satisfactory payment history over a certain period, usually at least 12 months.
- Down payment and credit: You may need to compensate for the increased risk by making a larger down payment (often 20% or more) and having a strong credit score. Some lenders may also require additional cash reserves.
- Lien subordination: In some cases, the IRS may agree to subordinate (make secondary) the federal tax lien to the new mortgage. This means the lender’s interest would take priority over the IRS lien, making the lender more willing to approve the mortgage.
- Lender guidelines: Different lenders have varying policies and guidelines regarding tax liens. Some may be more flexible than others, especially if the lien is relatively small or you can demonstrate significant income and assets.
The best approach is to be proactive and work with the IRS to resolve the tax debt as soon as possible. You may need to provide documentation from the IRS confirming the payment plan, the remaining balance, and your payment history.
Additionally, consulting with a qualified mortgage lender or broker can help you understand your options and determine the best path forward. They may be able to advise you on lenders more willing to work with borrowers with tax liens or recommend steps to improve your chances of approval.
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Getting approved for an FHA (Federal Housing Administration) loan with a federal tax lien is possible, but it can be challenging. Here are some key points regarding FHA loans and tax liens:
- FHA guidelines allow tax liens, but they must be resolved or have an approved repayment plan in place.
- If you have an outstanding federal tax lien, you will need to provide proof of a satisfactory repayment plan with the IRS. This typically involves: a. A written agreement from the IRS allowing monthly payments on the debt b. Evidence that payments have been made on time for at least 3-6 months c. Proof that the debt will be paid in full within the timeframe of the repayment plan
- FHA loans require a minimum down payment of 3.5%, but with a tax lien, lenders may require a larger down payment, often 10% or more.
- Your credit score and overall credit profile will be closely evaluated. Tax liens can negatively impact your credit score, so you’ll likely need a higher credit score to compensate for the increased risk.
- The lender may require additional documentation or explanations regarding the circumstances that led to the tax lien.
- In some cases, the IRS may agree to subordinate (make secondary) the federal tax lien to the new FHA mortgage. This can improve your chances of approval.
It’s crucial to disclose the tax lien upfront and provide all required documentation to the lender. Working proactively with the IRS to resolve the debt and obtain an approved repayment plan can significantly improve your chances of qualifying for an FHA loan.
Additionally, consulting with an experienced mortgage lender or broker who specializes in FHA loans can help you understand your options and navigate the process more effectively.
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You cannot get approved for a conventional mortgage loan with an outstanding federal tax lien. However you can qualify for a conventional loans with a written payment agreement with the IRS. Getting a mortgage with money owing to the IRS is generally very difficult, but not impossible in all cases. Here are some key points regarding conventional loans and tax liens:
- Most conventional lenders have strict guidelines when it comes to tax liens. An outstanding federal tax lien is usually considered a major derogatory event that can significantly impact your ability to qualify.
- If the tax lien remains completely unpaid with no repayment plan in place, approval for a conventional loan is highly unlikely. Lenders see this as an unresolved delinquent debt.
- If you have entered into an approved repayment plan with the IRS, some lenders may consider your loan application, but several compensating factors are typically required:
- Excellent credit score (700+)
- Substantial down payment (20% or more)
- Solid employment/income history
- Significant cash reserves
- Even with a repayment plan, the lender will want to see a proven payment history over a certain period, often 12 months or more of on-time payments.
- The lender may require documentation from the IRS validating the repayment plan details and your current payment status.
- In rare cases, if the tax lien amount is relatively small compared to your income and assets, some lenders may be willing to consider your application if other aspects of your financial profile are very strong.
It’s important to be upfront with prospective lenders about the tax lien situation. Be prepared to provide extensive documentation and compensate for the increased risk with a larger down payment, excellent credit, and ample cash reserves.
Consulting a mortgage broker who has experience dealing with tax lien situations can be beneficial, as they may have relationships with more flexible lenders or suggestions on the best steps to improve your chances of approval.