Conventional Loans With Tax Liens

Fannie Mae Guidelines on Conventional Loans with Tax Liens

Overview of Conventional Loans with Tax Liens

Like other lenders, Fannie Mae, the Federal National Mortgage Association (FNMA), serves conventional loans with specific requirements that determine a borrower’s creditworthiness and a property’s eligibility. Regarding federal tax liens, Fannie Mae’s regulations are especially harsh because liens placed by the IRS are prioritized over mortgage liens. These guidelines are meant to assist borrowers with tax liens or IRS payment arrangements under the conventional loan within Fannie Mae’s guidelines (As updated in April 2025).  In the following paragraphs, we will cover conventional loans with tax liens.

Key Fannie Mae Guidelines on Conventional Loans With Tax Liens

Fannie Mae does not allow borrowers with an unresolved federal tax lien to qualify for a conventional loan unless the lien is paid in full. The detailed instructions are listed below:

No Active Federal Tax Lien Allowed: Conventional Loans With Tax Liens

A federal tax lien notice filed against the borrower in the district where the subject property lies prevents the borrower from accessing a conventional loan. The borrower must ensure that the tax debt amount is cleared entirely and the lien is removed on or before the closing date. This helps to guarantee that the IRS’s claim does not hinder the lender’s first lien position.

Resolving the Tax Debt: Conventional Loans with Tax Liens

All borrowers must prove that the tax debt associated with the lien has been paid in full or fully settled. Acceptable documentation includes a release of the lien from the IRS, proof of payment, etc., which can be bank statements or payment confirmation, either sent directly from the IRS or other systems set up by the bank.

Conventional Loans With Tax Liens: The Impact of the Tax Payment Plan

The tax lien that has not been settled presents a major problem for lenders due to the primary claim on the property’s mortgage lien. This risk also threatens the ability of the lent funds to be used in the case of foreclosing or selling the real estate.

Conventional Loans With Tax Liens: Qualifying With Payment Plan (Installment Agreement) with the IRS

Unresolved tax liens can cause a disqualification of borrowers. However, Fannie Mae does extend the courtesy of allowing borrowers to qualify for a conventional loan if they hold an IRS installment agreement as long as they meet specific requirements. These criteria provide help to taxpayers with a tax liability actively managing their repayment plans:

Conventional Loans With Tax Liens: Approved Agreement (with the IRS)

The borrower must have an IRS-approved payment plan clearly showing payment and itemized due dates, including a list of dues for each month, monthly payment, and total amount owed.

• The agreement must be current. The borrower must still make the required payments.

Payment History

Before closing a loan, a borrower must make at least one payment on the installment agreement. Payments’ structures vary widely. Make FHA (Federal Housing Administration) loans mandatory in three payments. Fannie Mae is more flexible.

Federal Tax Lien Legality

There can be no Notice of Federal Tax Lien indication for a borrower within the region where s/he is interested in acquiring a loan. Lenders search public records during underwriting to check this.

Debt-to-Income Restraints

In these IRS contracts, the fee payment within the agreement falls within a borrower’s monthly payment obligations. This payment, however, is treated as a recurring debt when the borrower’s DTI (debt-to-income ratio) is calculated.

Fannie Mae usually prefers a DTI ratio lower than 43. Still, it will exercise flexibility to borrowers with strong compensating factors, such as high credit scores or substantial reserves.

Conventional Loans With Tax Liens: Required Documentation

• Provide the approved IRS repayment contract, which is known as the installment agreement.
• You also need to provide documentation evidencing continuity of payments, including a notice from the IRS reminding the borrower of the last payment, indicating the amount, the date on which the payment was made, and the next payment due.
• Verification must show that the borrower meets the conditions, but in every possible case, once payment has been made before closing.

Conventional Loans With Tax Liens: Exceptions for DTI Exclusion

If a debt qualifies as “Debts Paid by Others” or “Installment Debt,” the IRS payment can rarely be included in the DTI ratio. Fannie Mae’s criteria would have to be met (for example, the debt is paid by a different party). However, this is uncommon for agreements with the IRS.

Conventional Loans With Tax Liens: Comparison with FHA Loans

• FHA loans are more forgiving regarding tax liens than other loan types, which is not true for conventional loans.
• Under FHA guidelines, they will only qualify if:
• The borrower has an IRS payment plan with at least three consecutive payments over 3 months.
• The IRS issues a Subordination Agreement, placing the tax lien subordinate to the FHA mortgage lien.
• Fannie Mae-backed Conventional loans do not allow the subordination of tax liens, and a full resolution is required.

Steps for Borrowers with Tax Debt

To increase their chances of securing a conventional loan, tax debt borrowers should consider the following:

Conventional Loans With Tax Liens: Contact the IRS Early

Proactively initiate an installment agreement with the IRS to prevent a tax lien. Timely intervention can stop the IRS from filing a Notice of Federal Tax Lien.

• Gather Documentation: The payment history records and IRS installment agreement should be secured with the lender during the application process.
• Monitor DTI Ratio: Other debts (like credit cards) should be brought down to maintain an acceptable DTI ratio since IRS payment obligations will be included.
• Verify Lien Status: Using public records, coordinate with the lender to verify that no tax lien exists against the property in the county where it is located.
• Consult a Professional: Retain a mortgage specialist or tax attorney to negotiate IRS agreements and ensure adherence to Fannie Mae policies.

Why These Guidelines Matter: Conventional Loans With Tax Liens

Fannie Mae’s tax lien policies protect the mortgage market’s stability by controlling whether lenders can conclusively own the mortgage collateral and effectively claim the first lien. From a mortgagee’s lien perspective, tax liens are a significant threat since the IRS can seize property or garnish income, affecting mortgage repayment capacity. By requiring borrowers to resolve liens or set up a payment plan, Fannie Mae provides borrowers access to credit while managing risk for lenders.

Additional Considerations Conventional Loans With Tax Liens

• Credit Impact: Under an IRS payment plan, there are no direct consequences to credit scores.
• However, unpaid taxes or liens may be visible on credit or public records, decreasing the borrower’s credit score and loan terms.
• Loan Limits: Fannie Mae’s conventional loan limits for the year 2025 stay at $806,500 for most areas and $1,209,750 for the high-cost areas.
• The limits remain with or without owing tax debt.
• Underwriting Standards: Lenders may impose additional overlays beyond the Fannie Mae guidelines, such as requiring higher credit scores or lower DTI ratios for tax-debt borrowers.

A borrower with a federal tax lien cannot qualify for a Fannie Mae conventional loan until the lien is paid in full and released. Those with an IRS installment agreement can qualify if there is no lien, at least one payment has been made, the monthly payment is incorporated in the DTI ratio, and no active tax liens are present. Meticulous documentation and proactive tax debt management are essential to meet Fannie Mae’s requirements. It is recommended for taxpayers to consult a licensed mortgage specialist or tax attorney for tailored options.

Sources: Fannie Mae Selling Guide, B3-6-05 Monthly Debt Obligations, November 2023.

Additional References:

Notes:

• Policies may change without prior notice.
• Always consult a professional or the latest Fannie Mae Selling Guide for updated information.