IRS Tax Lien and Mortgage Approval for FHA Financing
by Lynn in Washington, DC
Ask Kate how an IRS tax lien affects mortgage approval for FHA financing: No one likes surprises during a loan application. Lynn is no exception. She just found out her FHA mortgage transaction can't close due to a tax lien still in negotiations because the underwriter is requiring three months paid into an IRS payment plan. What are her options for getting financed?
IRS Payment Plan and FHA Loan Guidelines By Lynn from Washington DC
I currently have a tax liability that is in negotiations with the IRS.
No payment plan or payment has been accepted as of yet.
My tax accounts have provided a letter of representation to my lender stating the facts. My lender just informed me that the underwriter is requesting 3 months of payments to the IRS before approving my loan.
I was suppose to settle on May 22 but that was impossible with these new conditions.
What are my options at this time? I can't afford to pay the liability in full.
Ask Kate answers: IRS Payment Plan and FHA Loan Guidelines
When your lender ran the Credit Alert Verification Reporting System (CAIVRS), it disclosed your IRS debt.
I question why the lender waited so long to run CAIVRS. This could have been done earlier on in the loan process. But alas, at this point I'm crying over spilled milk.
So moving on, why do lenders fuss so much over IRS liens? In a nutshell, it's a matter of which lien gets recorded first, the IRS lien or your mortgage lien. Additionally, there are debt ratios that a lender must consider.
IRS Tax Lien Recorded After Mortgage
In general, FHA does not require full payment of an IRS lien unless the IRS refuses to subordinate to the new mortgage
. This refers to the order in which liens are recorded. Since a lender's guidelines will always require a mortgage to be recorded in first position, the IRS must agree to second position. This is a logistical move which the IRS will usually approve.
IRS Payments Included in FHA Debt Ratios
If a tax payer with an IRS lien cannot immediately pay the entire debt, the IRS will often approve a payment plan. But these payments need to be included in the debt ratio when a tax payer applies for a mortgage.
FHA Requires Seasoning for IRS Payment Plans
But there is another guideline. FHA requires a payment history pertaining to the debt. This is called seasoning and becomes the fly in the ointment for many FHA borrowers with new IRS payment plans. Some lenders even require an entire year of seasoning.
So while I would like to offer a better solution, my thought is to make timely payments to the IRS for 3 months (your lender's requirement) before applying once again for FHA mortgage financing.
While making payments to your IRS plan, you should maintain excellent records. Make copies of front and back of each cancelled check. Copy your bank statements each month also. Establish a file with copies of the checks, bank statements, and IRS payment plan so the pertinent records will be easily accessible for the next mortgage process. Here is a list of other items needed for a mortgage application
Word of Caution to All Mortgage Borrowers
A myriad of qualifying parameters are considered during mortgage approval. So never assume that you do not qualify for mortgage financing because of an IRS lien or a non-seasoned IRS payment plan. In other words, do not self-diagnose. Always contact a lender for specific answers to your individual circumstances.
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