Purchasing a home can be a stressful experience for many people, especially when it comes to qualifying for financing, securing a mortgage, deciding how much of your hard-earned money to put down, the inspection of the home, etc. Adding the anxiety associated with a looming tax lien only exacerbates the level of stress and uncertainty with the process. You may even be concerned that your outstanding tax debt may disqualify you from qualifying for a mortgage or financing.
If you find yourself in this situation, it is important to familiarize yourself with what a tax lien exactly is, the impact of the lien on your finances, and what steps you can take to get the lien removed.
What is a Tax Lien?
A tax lien is generally considered to be a legal claim that the IRS can assert over an asset or piece of real estate in order to satisfy the amount owed in back taxes. For example, if a homeowner fails to pay the requisite property taxes on a home, the government has the ability to place a tax lien on the home as a method of collecting on the unpaid taxes. When you sell a property that has a tax lien, the lienholder will usually demand payment out of the proceeds. However, if the sale does not cover the full amount, the lienholder does not lose its claim. In fact, the tax lien remains on the property until the statute of limitations expires.
By the time one receives a written notice from the IRS regarding unpaid taxes, they (the IRS) do not provide you with much time to get your finances together. In fact, you typically only have ten days to pay the delinquent taxes. If no action is taken within the ten-day period, the tax lien becomes public record and will appear on your credit report. At this point, your homebuying process becomes more complicated in two respects: (i) tax liens typically have a negative impact your credit score, which makes it more difficult to finance your next home purchase; and (ii) some mortgage lenders and homebuyers are not open to working with a prospective buyer while navigating the tax lien process.
Financing Your Next Home
Some banks and financial institutions are willing to overlook a few minor blemishes on a mortgage applicant’s credit report, but a tax lien will often raise a bright red flag that could stymy the process. For example, if you are applying for an FHA home loan, you will need to undergo a process called “manual underwriting,” where the lender examines your debt-to-income ratio and other stringent eligibility factors. You might also have to ask the IRS to subordinate its lien interest, giving the FHA priority.
It is worth noting that if you have not made much headway in paying back the tax debt, many traditional lenders may outright refuse to finance your next home purchase. However, if you are in an installment agreement with the IRS and are consistently making payments, you might have a chance.
Have Questions? Learn More About Tax Debt Relief by Contacting Anderson Bradshaw Today
Navigating the complexities associated with tax liens, financing options, or purchasing a home can be extremely challenging. Our tax consulting firm, Anderson Bradshaw, is comprised of skilled and experienced tax professionals that can help you through your unique tax situation, including ways to secure tax debt relief. With over three decades of experience in the industry, we have seen many different tax issues and have learned the best ways to handle them based on our clients’ unique situation. For further information or to schedule a free 30-minute Tax Consultation contact Anderson Bradshaw today at 877-550-3911 to or fill out this form to receive a complimentary Tax Evaluation.
