Can You Qualify for FHA Financing: IRS Tax Extension
by Nic in Chicago, Illinois
Ask Kate how to qualify for the FHA home loan when you need an IRS tax extension: It's not impossible to get a mortgage with a federal tax lien! But what about an IRS tax extension, Nic asks. Keep reading to learn about qualifying for FHA financing when you owe income tax to the Internal Revenue Service.
FHA Financing with an IRS Tax Extension By Nic from Chicago, Illinois
My wife and I are two months away from closing on a new-construction home that is in the process of being built. We were approved with an FHA loan.
Due to my wife's self-employment, we had to show a large amount on our tax returns for 2013 because the lender would not accept her 2012 W2 income in her 2 year average.
Unfortunately, we now owe $9,200 to the IRS and $2000 to our state revenue service.
This would not be an issue if we had until October to pay this off, however our loan officer instructed us that this has to be paid in full by our mid-August closing.
Sadly, a payment plan is not much of an option because we are at the higher end with our debt-to-income.
The IRS does offer an extension of 120 days to pay it in full, which would fall in October, but as I said, our loan officer said the FHA will require this payment in full before closing.
1. Do we have any viable options?
2. Will the 120 day extension actually stop us from closing if it is not paid in full by that point?
3. Will the 120 day extension show as one large debt to the lender?
4. If we are able to come up with the money before closing, how close can we cut it to the closing date?
***zz-portrait-left.shtml*** Ask Kate answers: Can You Qualify for FHA Financing When You Have an IRS Tax Extension
My first question is this. Are you positive that the IRS will not qualify you for a payment plan in lieu of an extension?
IRS Installment Agreements and Debt Ratios
If you have not contacted the Internal Revenue Service regarding their installment agreements, I would encourage you to call right away.
Of course, being granted a payment plan is not a free ticket to mortgage approval.
Along with your house payment and other consumer debt such as car payments or credit card balances, the required monthly payment to the IRS will be calculated in your qualifying debt ratios. That means the lender wants to be sure a borrower can afford the payment to the IRS on top of the house payment and other obligations. Here's how lenders calculate debt ratios
IRS Payment Plans and Subordination Agreements
Secondly, there is another hoop to jump through, subordination agreements. Many borrowers worry when they hear that an installment agreement requires a subordination agreement from the Internal Revenue Service before they can buy their home or close on a refinance. However, the Internal Revenue Service often takes a second lien position without too much extra paperwork.
But to be sure you have a good grasp of the process, go to HARP Refinance and Subordination Agreements
How IRS Tax Extensions Affect Loan Approval
Now let's switch gears to answer your questions. Even though FHA guidelines often allow IRS payment plans, tax extensions may be quite another matter.
Here is what the FHA says about extensions during the mortgage process...
'FHA allows you to re-establish credit if any outstanding tax liens have been satisfied or appropriate arrangements have been made to establish a repayment plan with the IRS or state Department of Revenue.'
Or in plain English, if (which is very likely) the lender conditions a loan approval on paying off the lien or entering into an installment agreement, closing cannot occur alongside a tax extension.
You also asked if the debt will show as a lump sum during the 120 day extension. I can't be sure but I'm inclined to think so.
FHA Mortgage Guidelines Require Paper Trails
But let's say you come up with the money to pay off the IRS. You will be required to show the source of funds (where the money originated) used to eliminate taxes owed.
You might think money is money! Who cares about the source. Well, welcome to lending - Bankers are picky about paper trails. Please prepare by asking your lender for acceptable sources of money and the proper way to document the funds going into your account. You will also need the paid receipt from the Internal Revenue Service. Get the scoop on paper trails here
Closing Your FHA New Construction Financing on Time
How right you are to be concerned over closing on time. Your contract for the new construction home has an expiration date. Don't even get me started on the fact that builders frequently run past closing dates. But don't think it is okay for borrowers to close late.
Your contract may even have a clause stating that you must pay a certain sum for each day that goes past the contract's close date.
But how much ahead of closing would you need to pay off the IRS taxes to meet your contract date? I can only give you a rule of thumb. Much depends on the skill level of your loan originator who will need to push your transaction to the front of the heap. Also coming into play is the workload of the underwriter and closing staff.
To be safe, you should plan on having the taxes paid off using an acceptable source of funds as well as the paid-in-full receipt (and release of lien, if applicable) into your loan originator at least 2 weeks before closing.
Self-employed borrowers seeking mortgage financing will also want to read Mortgage Tips for Self-Employed Borrowers
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