Qualifying For Home Loan With Tax Lien and Judgment

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In this article, we will cover and discuss qualifying for home loan with tax lien and judgments. Qualifying for home loan with tax lien is possible but the tax lien issue needs to be resolved. If you owe the Internal Revenue Service money, it is highly recommended that you contact them and arrange a written payment agreement.

Mortgage Guidelines on Qualifying For Home Loan With Tax Lien

Each loan program has its own guidelines on IRS debt, liens, and judgments. For FHA loans, you can qualify for an FHA loan with an outstanding tax lien with a written payment agreement. Fannie Mae and Freddie Mac do not allow tax liens but they do allow written payment agreements on back taxes you owe on conventional loans.

Can I Get a Home Loan With Tax Lien?

HUD allows you to qualify for a mortgage with a federal tax lien under conditions you have a written payment agreement and have made three months of timely payments after the execution of the written agreement. Fannie Mae and Freddie Mac allow you to You cannot qualify for home loan with tax lien on conventional loans. Only if you owe the IRS but the debt did not turn into a lien yet. HUD allows you to get a home loan with tax lien on an FHA loan.

 

How Can I Set Up a Payment Plan With IRS To Get a Mortgage?

Can you get a mortgage with an IRS installment agreement is one of our common frequently asked questions at Gustan Cho Associates The answer is absolutely you can. The IRS will be more than happy to work with you if you owe them money and make payment arrangements. If you make arrangements with the Internal Revenue Service immediately, the IRS will not place a tax lien against you. If you make a settlement with the IRS, the federal agency will not report it to the credit reporting agencies.

If you ignore your past due IRS obligations, they will pursue collection actions against you. The IRS will not hesitate in reporting you to all three credit reporting agencies. In this article, we will discuss and cover Qualifying For Home Loan With Tax Lien And Judgments.

Mortgage Guidelines on Qualifying For Home Loan With Tax Lien

Qualifying for home loan with tax lien, judgments, and collection accounts with balances is not a problem and can be done. Borrowers can qualify for mortgage loans with outstanding unpaid charged-off and collection accounts. FHA has similar lending guidelines on unpaid collection accounts and qualifying for home loan with tax lien as VA, USDA, Fannie Mae, and Freddie Mac.

Fannie Mae Collection Account Guidelines on Primary vs Investment Homes

With conventional loans, unpaid collection accounts may need to be paid or a payment agreement may be required on investment property loans. Agency guidelines allow lenders to approve borrowers with unpaid collection accounts, charge-offs, and judgments on owner-occupant home loans.

Primary Residences:

1. Collections and Charge-Offs: Fannie Mae does not require that unpaid collection accounts, charge-offs, or non-mortgage charge-offs be paid off for the borrower to qualify for a loan secured by a primary residence. However, the lender must consider these accounts when evaluating the borrower’s credit reliability and capacity to repay the loan.
2. Risk Assessment: While unpaid collections and charge-offs don’t necessarily need to be paid off, they can impact the borrower’s credit score and overall risk profile, which may influence the lender’s decision.
3. Underwriting Flexibility: Lenders have some discretion in underwriting decisions and may require payment or resolution of these debts if they deem it necessary to mitigate risk.

Investment Properties:

1. Collections and Charge-Offs: For investment properties, Fannie Mae requires that all unpaid collection accounts, charge-offs, and non-mortgage charge-offs totaling more than $250 must be paid off before the loan can be approved.
2. Higher Standards: The guidelines for investment properties are stricter because they are considered higher risk than primary residences.
3. Debt Resolution: Resolving outstanding collections and charge-offs is essential for securing a loan for an investment property. It ensures the borrower’s financial stability and ability to manage additional property debt.

General Considerations:

1. Credit Score Impact: Both primary and investment property loans will consider the impact of collections and charge-offs on the borrower’s credit score.
2. Manual Underwriting: In some cases, loans may be subject to manual underwriting, where a more detailed analysis of the borrower’s financial situation is conducted, particularly if there are significant unpaid collections or charge-offs.
3. Compensating Factors: Lenders may look for compensating factors such as a higher down payment, substantial cash reserves, or a low debt-to-income ratio to offset the risks associated with unpaid collections and charge-offs.

These guidelines ensure that while primary residences have some flexibility, investment properties are held to higher standards to mitigate the increased risk.

Types of Collection Accounts

HUD categorizes collection accounts into two categories:

• Medical Collections
• Non-medical collections

With medical collections, FHA exempts all medical collection accounts no matter how much the unpaid balance is. With non-medical collection accounts, FHA does not require to have an outstanding collection to be paid but a hypothetical monthly payment will be used on outstanding collections over $2,000.

Can You Have Collections For FHA Loans?

If the total unpaid collection accounts on non-medical collection accounts are greater than $2,000, then 5% of the unpaid collection account balance will be used to calculate the borrower’s monthly debt-to-income ratios.

Borrowers do not need to pay the 5% of the unpaid collection account balance. It is just a hypothetical monthly payment used. The reason they do this is in the event if the unpaid collection account converts into a judgment.

Case Scenario Qualifying For An FHA Loan With Outstanding Collections

For example, if the unpaid collection account balance is $10,000. 5% of the $10,000 or $500 will be used as a monthly debt obligation to calculate the debt-to-income ratio. This will be the case even though borrowers do not need to pay it. However, if the borrower can get a written payment agreement from the creditor, the monthly payment agreement will be used in lieu of the 5% of the outstanding collection balance.

What If Unpaid Non-Medical Collection Account Has a Large Balance?

If the unpaid non-medical collection account has a substantially large unpaid balance, 5% of the unpaid balance may disqualify borrowers due to the large monthly payment calculation on the unpaid collection account balance. In cases like this, here is what borrowers do have a few options.

Do Collections Count as Part of Debt-To-Income Ratio For FHA Loans?

Borrowers can enter into a written payment agreement with the collection agency. Whatever the monthly payment amount they negotiate, that payment will be used for debt-to-income calculations.

In the above example. if the borrower has a $10,000 outstanding unpaid balance with the creditor and/or collection agency he or she can enter a written monthly payment agreement of a $200 per month payment. That $200 monthly payment will be used as a monthly debt obligation instead of the $500 or 5% of the $10,000 unpaid collection account balance.

How Do Tax Lien And Judgment Affect Getting Approved For Mortgage?

You can qualify for government and conventional loans with collections, charged-off accounts, and other derogatory credit. Qualifying For Home Loan with a tax lien and/or judgment is totally a different apple. Tax liens and judgments need to be resolved either by having the following done.

The tax lien and/or judgment needs to be paid off completely or settled. HUD allows a written payment agreement on tax liens with the IRS. Fannie Mae and Freddie Mac do not allow tax liens.

Fannie Mae Guidelines on Conventional Loans With Tax Liens

Fannie Mae guidelines and Freddie Mac does not allow borrowers to have a tax lien on conventional loans. You can owe money to the IRS with a written payment agreement but not a lien.

If you can make a payment agreement,  you are eligible. However, it cannot be a tax lien.

Mortgage Guidelines on Written Payment Agreement With The IRS

HUD, the parent of FHA, allow borrowers with federal tax liens only if they have a written payment agreement with the IRS. Fannie Mae and Freddie Mac allow people who own money to the IRS to qualify for conventional loans only if they have a written payment agreement with the IRS but do not allow tax liens.

How Can I Qualify for a Mortgage With a Written Payment Agreement With The IRS?

If you owe money to the IRS, you can make a written payment agreement with the back due taxes and be eligible for FHA and conventional loans. In order for lenders to accept monthly payment agreements on tax liens and judgments it on if it is a written payment agreement with the IRS or judgment creditor.

How Long Do I Wait After IRS Payment Agreement For Mortgage?

They need to have made three timely payments after the written payment agreement for FHA loans and judgments.  With conventional loans, you do not have to wait three months once the payment agreement has been executed.

As long as you have or will make one payment of your IRS monthly debt payment prior to closing, you will qualify for conventional loans.

HUD Guidelines on Conventional Loans With Tax Liens

HUD allows borrowers with tax liens to be eligible for an FHA loan. To get a mortgage with a tax lien, borrowers need to get the following:

• a written payment agreement with the IRS
• show three months of canceled checks or bank statements reflecting the withdrawal being made from the bank account to the Internal Revenue Service

The balance of the tax lien does not matter as long as consumers are making the minimum payment agreement with the Internal Revenue Service:

• Can have a tax lien of $50,000 and be making a monthly agreed payment of $100 per month and that will be sufficient in qualifying for a mortgage with tax lien
• Same with an unsettled judgment

As long as consumers have a written payment agreement with the judgment creditor and have been making three months of payments with the judgment creditor, they are good to go.

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