With the resurgence of the housing market, more people are finding it easier to buy new homes. Even so, you may hesitate to submit a mortgage application because you still owe the IRS a tax debt. Discover how unpaid taxes can impact your ability to buy a home and how lenders regard IRS debts when considering new mortgage applications.

IRS Debt and the Mortgage Application Process

Few people go into a mortgage application process with perfect credit records and no debts to their names. In fact, millions of people each year are approved for mortgages owing money to creditors like student loan financiers, hospitals, auto finance companies, and others.

Moreover, many mortgage lenders today have no problem helping people who have serious blemishes on their credit records. They may be able to overlook or work around credit mishaps like:

• bankruptcies
• collections
• charge offs
• judgments

However, a tax debt is held in a different regard simply because of the leeway the IRS enjoys when collecting on what is owed. When you owe the IRS money, you could be subject to a tax lien or levy at any time particularly if you have made little no to effort to satisfy the debt.

Mortgage lenders realize the risks that come with owing the IRS money and what measures this federal agency can use to recoup outstanding tax balances. They do not want to loan money to someone whose house could be levied.

You might believe that you are doomed to being denied a mortgage for as long as your tax debt remains unsettled. It is true that if you take no action whatsoever to pay it off that you are likely to be denied for a home loan. However, if you take curative actions to settle the account, you could make yourself more appealing as a mortgage applicant and might up your chances of eventually being approved.

Proactive Measures to Handle Tax Debts 

Your ideal method of being approved while owing a tax debt is to pay off what you owe the IRS. If the debt no longer exists, the mortgage lender has no reason to hold it over your head as a reason for your denial. Paying off the amount could increase the likelihood of you being approved for a home loan.

If the amount is too great to pay off in full, you should at least make some attempt to pay it off in increments or settle it for a lesser amount. In particular, if you are applying for a VA loan, you could still be approved with an active tax debt if you:

• are set up on a suitable monthly installment agreement with the IRS
• have made at least 12 consecutive payments on the installment agreement
• satisfy the debt-to-income ratio requirements even with the monthly IRS payment
• can provide of the outstanding tax debt balance on your mortgage application

Even if you can prove these key details, you may still not qualify for standard underwriting of your mortgage. You may need to seek out manual underwriting, which could put more intense scrutiny on your debts and lower the required debt-to-income ratio. 

If you are not approved for a mortgage right now, you should not despair about your chances of being approved in the future. It is important that you take action now to deal with your IRS debt and to pay it off as soon as possible. You can accomplish this by hiring a tax professional if necessary and setting the debt up on an installment agreement or by making an Offer in Compromise to settle the debt for a reasonable lower amount.

You should also check your credit report once a year and report any inaccurate information or discrepancies. Removing inaccurate or outdated information could raise your score and improve your overall credit record.

Mortgage lenders regard tax debts as riskier than other types of debt. Still, an unsettled IRS debt may not sink your chances of being approved for a home loan. You can improve your chances of approval now or in the near future by knowing what proactive steps to take to pay the IRS and handle your tax debt satisfactorily.