Can you buy a house if you owe the IRS? Under Fannie Mae’s Selling Guide, owing delinquent federal income taxes doesn’t on its own rule out a conventional loan. Say you’ve entered into or applied for an IRS installment agreement. Say there’s also no indication that a Notice of Federal Tax Lien has been filed against you in the county where the home sits. Then the guide asks your lender to document the plan and count the monthly payment with your other debts.
If any of the guide’s conditions aren’t met, the guide says the balance has to be paid off. A lender can also add its own requirements. Other loan programs set their own rules.
So your paperwork and whether a lien has been filed decide which path you’re on. Know both before you talk with a loan officer.
What Does Fannie Mae’s Guide Say About Owing the IRS?
Fannie Mae’s Selling Guide on monthly debt obligations has a paragraph on federal income tax installment agreements. It covers a borrower with a payment plan, approved or applied for, to repay delinquent federal income taxes. It’s general information for lenders, not an offer. A loan officer can say how it applies to a specific loan.
The guide’s rule starts this way: “When a borrower has entered into or applied for an installment agreement with the IRS to repay delinquent federal income taxes”. An installment agreement is the IRS’s name for a payment plan.
The guide is written for lenders that sell conventional loans to Fannie Mae. A lender can add its own requirements on top of it.
What Papers Does a Lender Need for an Approved IRS Payment Plan?
Say the IRS has approved your installment agreement. Fannie Mae’s Selling Guide then asks the lender for a copy of that agreement. It also asks for proof you’re current on the payments. So the agreement itself and your payment history are the two things to have in hand.
For an agreement the IRS has approved, the guide asks for “a copy of the approved IRS installment agreement with the terms of repayment, including the monthly payment amount and total amount due” and “evidence the borrower is current on the payments associated with the tax installment plan”.
The same paragraph gives one example of acceptable evidence: “the most recent payment reminder from the IRS”. That reminder shows your last payment amount and date, plus the next payment amount owed and its due date.
What If Your IRS Payment Plan Is Still Pending?
Fannie Mae’s Selling Guide also covers an installment agreement you’ve applied for that the IRS hasn’t approved yet. For a pending agreement, the lender needs a copy of your application, including the terms of repayment, the monthly payment amount and the total amount due. Same paragraph, different stack of paper.
When an agreement is pending approval, the rule asks for “a copy of the application for the installment agreement with the terms of repayment”.
Keep a copy of what you sent the IRS. Then you can show the terms you applied for.
Does an IRS Payment Plan Count as Monthly Debt?
Yes, in both cases. If you’re not paying the amount owed in full, Fannie Mae’s Selling Guide says the lender must count the monthly payment. It sits alongside your other debts when the lender works out your DTI ratio, your monthly debts compared with your monthly income.
The same paragraph puts it this way: “if the borrower is not paying off the amount owed in full, the lender must include the monthly payment amount” as part of the borrower’s monthly debt obligations.
Fannie Mae’s guide also points to narrow cases where the payment on an approved agreement can be left out of the DTI ratio. Those turn on its rules on debts paid by others and on installment debt, and a loan officer can say whether either one applies.
If you’re new to the idea, here’s how your debt-to-income ratio shapes approval.
What If the IRS Has Filed a Tax Lien?
Fannie Mae’s Selling Guide ties its installment-plan path to one more condition. Under that rule, there can be no indication that a Notice of Federal Tax Lien has been filed against you in the county where the home sits. So a filed lien matters as much as the plan itself. Find out before you apply.
The guide’s condition is that there is no indication that “a Notice of Federal Tax Lien has been filed against the borrower in the county in which the subject property is located”.
The IRS explains a federal tax lien as a public document it files, the Notice of Federal Tax Lien, “to alert creditors that the government has a legal right to your property”.
The IRS also says this: “Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit.”
When Does the Balance Have to Be Paid Off?
Under Fannie Mae’s Selling Guide, if any of the conditions in its installment-agreement paragraph aren’t met, the balance has to be paid off. Those conditions are the plan, the paperwork and no indication of a filed lien in the county where the home sits. Each one counts.
The guide says that in that case “the borrower must pay off the outstanding balance due under the installment agreement with the IRS”. It handles that payoff under its separate topic on debts paid off at or prior to closing.
The IRS says this: “The IRS releases your lien within 30 days after you have paid your tax debt.”
Other debts follow other rules, and the payoff rules for collection accounts work differently.
Do FHA and VA Loans Follow the Same Rules?
Fannie Mae’s Selling Guide covers conventional loans sold to Fannie Mae. FHA, VA and other loan programs set their own rules. Lenders can layer on requirements of their own. So the answer for you depends on the kind of loan you’re considering.
Ask a loan officer which rules apply before you choose a loan.
What to Gather Before You Talk With a Lender
The rules turn on papers you can collect: your installment agreement or your application for one, your most recent IRS payment reminder, and whether a Notice of Federal Tax Lien has been filed. Not sure what you owe? Confirm the balance with the IRS first. Take tax questions to a tax professional.
Fellowship’s home purchase page puts it this way: “In the dynamic world of real estate, having a trusted advisor as your loan officer can make all the difference.” It also says: “We offer a range of mortgage options, designed to fit diverse financial needs and aspirations.”
Frequently Asked Questions About Buying a House When You Owe the IRS
Can you buy a house if you owe the IRS?
Under Fannie Mae’s Selling Guide, owing doesn’t on its own rule out a conventional loan. With a documented installment agreement and no sign of a filed lien in the county where the home sits, the lender counts the payment. If a condition isn’t met, the guide says the balance has to be paid off. Other programs and lenders can differ.
Do you have to pay off back taxes before buying a house?
Not always, under Fannie Mae’s guide. It depends on whether the guide’s conditions are met, including the paperwork and whether a lien has been filed. If any of them aren’t met, the guide says the balance has to be paid off. Ask a loan officer how the rule reads for your loan.
Does a pending IRS payment plan count?
Fannie Mae’s guide covers installment agreements you’ve applied for and the IRS hasn’t approved yet. For a pending agreement, the lender needs a copy of the application with its terms of repayment, the monthly payment amount and the total amount due. Keep your own copy of what you sent.
Will a lender count my IRS payment as debt?
Under Fannie Mae’s guide, if you’re not paying the amount owed in full, yes, the monthly payment counts in your monthly debt obligations. The guide points to narrow exceptions tied to other rules of its own. A loan officer can check whether one of them fits your file.
Does a federal tax lien affect buying a house?
Fannie Mae’s guide applies its installment-plan path only when there’s no indication of a filed lien in the county where the home sits. The IRS says that once it files a Notice of Federal Tax Lien, that may limit your ability to get credit. Ask a loan officer before you apply.
What proof of IRS payments does a lender want?
Fannie Mae’s guide asks for evidence that you’re current on the plan’s payments. Its example is your most recent payment reminder from the IRS. That reminder shows the last payment you made and the next one due.
Questions to Bring to Your Loan Officer
Tax debt is easier to plan around when you ask before you apply. So bring your IRS papers and your questions instead of guesses. A loan officer can tell you how the rules read for the loan you’re considering. These four questions are a good start:
- Which rules apply to the kind of loan I’m considering?
- What papers do you need from my IRS payment plan?
- How would my IRS payment be counted with my other debts?
- What happens if a tax lien has been filed?
When your IRS papers are together, you can talk with a Fellowship loan officer about buying a home.
