- Do You Need Tax Payment History for Mortgage Approval?
- Challenges of Buying a House with Unpaid Taxes
- Alternative Financing Options
- Other Considerations for Tax-Delinquent Buyers
- Steps to Take Towards Homeownership
- Talk to Realtors and Mortgage Lenders to Buy a Home
Can You Buy a House if You Haven’t Filed Taxes?
The first step when buying a house is making sure you qualify for a mortgage. Lenders will review your finances and provide an estimate of how much they are willing to give you.
Along with submitting your pay stubs, bank statements, and other forms, you will also need to share your recent tax documents. Without these key forms, you can’t prove to lenders that you are a trustworthy person to give a loan to.
Unfortunately, this makes buying a house more difficult during tax season. If you want to buy a house in the spring, you might have to scramble to file your taxes before you can start making offers on homes.
Buying a house is also challenging if you have never filed taxes, owe back taxes, or simply forgot about them in previous years. Can you buy a house if you haven’t filed taxes? It’s difficult but possible.
Follow these steps to get your finances in order so you can streamline the homebuying process.
Do You Need Tax Payment History for Mortgage Approval?
Your taxes serve as definitive proof of your annual income. While a paystub highlights how much you earned last month and provides a snapshot of your income, your taxes report your annual earnings.
They list out the amount you earned from each employer, which is important if you have multiple jobs (which means you receive multiple W2s) or if you picked up 1099 contract work and received W9s.
Mortgage lenders use tax returns in their calculations to determine how much you can borrow. They use your reported income as their basis for calculating your debt-to-income ratio.
In most cases, lenders are looking for a debt-to-income ratio of 36%. This means your expenses (including your mortgage payment) won’t exceed 36% of your monthly income.
Lenders also look at your tax history to determine how trustworthy you are. A borrower who files their taxes each year is more reputable than a borrower who misses tax payments or forgets to file. Everyone makes mistakes, so it’s okay if you needed an extension at one point, but know that your lenders care about your financial history.
Paying your taxes regularly and accurately is just as valuable to your lender as making monthly payments to your landlord.
Challenges of Buying a House with Unpaid Taxes
There are two types of unpaid taxes to consider: taxes you haven’t filed yet and taxes you are behind on.
If you are trying to buy a house in the spring, it’s likely that you haven’t paid your taxes from the previous year yet. You will need to work quickly to file as soon as you have your W2 or W9 wage statements from your employer. The sooner you file your taxes, the sooner you can send the returns to your lender to buy a house.
The second situation is more complicated. If you owe taxes to the IRS or haven’t filed over the years, you will need to work with an accountant or tax professional to clean up your financial situation. Here are a few reasons why it is important to pay any unpaid taxes.
You Will Have a Tax Lien from the IRS
A tax lien is a legal claim from the federal government when you fail to pay your tax bill. This is tax debt that you owe the government. The underwriters your lender works with will notice any tax liens and make a note that you cannot pay your debt.
You can get rid of a tax lien by the IRS by paying off your debt. The agency will remove the tax lien 30 days after you make the payment, which allows you to move forward with the purchase process.
If you know that you owe money to the IRS, it might be easier to pay off the debt now and have a smaller down payment than you initially expected. It is better to prove to your lender that you can pay off your tax debt than to apply for a mortgage with several debts to your name.
Delinquent Taxes Come With Fines and Penalties
The IRS provides ample time for Americans to file their taxes. Most people receive their W2 and W9 statements by January 31st and have until April 15th to file their taxes. If you forget to file your taxes or make tax payments, you are delinquent in the eyes of the IRS.
Depending on how much you owe, the IRS could levy severe fines against you along with the tax liens that they issue.
It is better to file your taxes and develop a payment plan if you owe money instead of failing to file, which creates a tax lien. Regular payments that you are transparent about your debt and actively taking steps to pay it off.
You Can Sell Your Home if There is a Tax Lien Against It
If the IRS puts a tax lien against your assets, like your home, you can still sell them. You can use the equity from the home sale to pay your tax debt and clear these lines at the closing appointment. If you are currently a homeowner and want to move, selling your home is one way to get out of debt.
However, know that you will have a smaller down payment for your next house once the IRS takes their share for tax liens and other lenders reclaim the money you borrowed.
If you aren’t sure whether your home sale will produce enough money to cover your debts, talk to a financial professional or tax attorney. They can guide you toward the best steps to consolidate or pay off your debt so you can start the next chapter of your life.
Consider Developing a Payment Plan With the IRS
You still might qualify for a mortgage if you have tax debt. One option is to set up a payment plan with the IRS. You can make monthly payments toward the taxes you owe to prove that you are actively working to clear the debt. These payment plans can also build your payment history and prove that you are a reputable person to lend to.
As you meet with different mortgage lenders, ask them about your tax debt and tell them about your payment plan. They can tell you whether it is better to pay off your taxes completely – which means you will wait to buy a house – or whether you still qualify for a loan.
As long as the payments aren’t big enough to significantly impact your debt-to-income ratio, most lenders should accept the repayment agreement you have with the IRS.
Alternative Financing Options
If you have unpaid tax debt or are unable to produce your tax returns, there are still options to get a mortgage. Here are a few ways you might get the financing you need to become a homeowner.
- Non-qualified mortgages: these are also called non-QM loans and are designed for people who wouldn’t otherwise qualify for traditional mortgages. If you can’t produce certain financial documents, the lender might use other forms in your mortgage application. These loans often have stricter criteria and come with higher interest rates because they are riskier. However, a non-QM loan could be your best bet in some cases.
- Private lenders: you also might be able to work with private lenders instead of large banks and credit unions to secure a mortgage with unfiled taxes. These mortgage loans might come with added fees and higher rates because they come from a private source. However, if your private source is a parent or friend, the mortgage might be more favorable than a conventional loan.
- Seller financing: in this case, the seller agrees to fund your mortgage or you sign a rent-to-own agreement. While this could be a good option for someone who needs to pay down debt or build their credit score, rent-to-own agreements are also risky. They come with more fees and have greater potential for abuse by the homeowner. Make sure a Realtor looks at any rent-to-own agreement you consider to confirm that it is ethical.
It is possible to get a mortgage if you owe taxes. Look for alternative financing options beyond conventional loans that are fair and secure.
Other Considerations for Tax-Delinquent Buyers
Your tax returns are only one part of your loan application. While your lender cares if you owe taxes, they will also review other parts of your financial health. As you work to pay off your tax debts, you can make yourself more appealing to lenders in other ways. Here are a few things they will review if you want to get a mortgage.
- Credit score: there isn’t an official credit score that you need to get a mortgage, but lenders consider a score above 670 as good credit. A score above 740 is considered excellent credit.
- Credit utilization: lenders will consider the percentage of your credit that you use each month. If you use too much of your credit, it is considered risky.
- Payment history: lenders want to make sure you will make your monthly mortgage payments. They will look at the payment history for your student loans, car financing, rent, credit cards, and other recurring debt.
- Employment: some lenders might look at your employment history to see how long you stayed with different companies. Gaps in employment are considered risky because they leave you without a source of income, increasing your chances of missing payments.
- Available cash: your down payment significantly affects your loan because it determines how likely the bank is to recoup its funds if you face foreclosure. The larger the down payment, the lower the risk to the bank.
If you have a federal tax lien but an otherwise stellar financial picture, your lender might be willing to help you get a mortgage. You can also work with a tax attorney to clear that lien before moving forward with the purchase process.
Steps to Take Towards Homeownership
Homeownership is a process that takes most people several months. Try not to get overwhelmed by all the steps you need to take. Instead, you can set small goals to improve your finances and prepare yourself and your family for this major purchase. Here are a few steps to take.
- Address your tax issues: work with the IRS to identify your tax lien and take steps to pay it. Compile your tax returns from previous years to prove that you are in good standing.
- Gather all of your financial documents: save your pay stubs, receipts on rent payments, 401(k) statements, and any other financial information you have.
- Explore your financing options: talk to a lender to see if you qualify for a conventional loan, FHA loan, or non-QM loan. Once you know your options you can make plans to pursue them.
- Set a reasonable budget: your lender should tell you what size loan you qualify for. This will help you set a budget when you start house hunting.
- Identify your ideal neighborhood and amenities: get an idea of where you want to live and what features in a home you consider essential. This way you won’t end up in a house you are unhappy with.
- Meet with real estate agents: interview multiple Realtors and tell them about your buying goals. The right partner can help you find a house within your budget.
Careful planning can help you find the best possible home with mortgage payments you can afford.
Talk to Realtors and Mortgage Lenders to Buy a Home
Once you are ready to buy a home, make sure your finances are in order. Find your tax returns from this year and previous years so you can send them to your lender. Make sure you don’t owe taxes or have addressed your tax debt with the IRS. By taking these steps proactively, you can streamline the mortgage process and focus on house hunting instead. You don’t want to lose your dream home because of unfiled taxes.
If your finances are in order, find a real estate agent in your area. This is where the professionals at FastExpert can help. Look at the different profiles of various Realtors and find the best people to meet your needs. With the right agent, lender, and financial advisor, you can create a team of experts ready to help you buy a house. Try FastExert and take the first steps toward buying a house today.