Getting a Mortgage While You Owe the IRS
An approved installment agreement does not have to be paid off before you close. Four conditions have to be met, and one of them trips up most files.
Quick answer
Saxton Mortgage does. On a Fannie Mae conventional loan, the plan payment can be counted in your debts instead of paying the tax balance in full, as long as no Notice of Federal Tax Lien has been filed in the county where the home is, you are current on the plan, and at least one payment was made before closing. On FHA, you need at least three months of timely payments under the agreement, and you cannot prepay to reach three months.
An installment agreement is workable
Owing back taxes is not the same as being disqualified.
- Approved installment agreements are permitted rather than requiring the balance to be paid off before or at closing.
- The file needs a copy of the approved plan showing the repayment terms, the required payment, and the total amount due.
- You have to be current on the plan as of closing. A missed payment while the loan is in process is a real problem.
- The payment required under the plan is counted in your debt calculation, the same way a car loan would be.
- The critical condition: the plan cannot carry a lien on any property. A recorded federal tax lien changes the answer.
- At least one program requires a three-month history of payments on the plan before the balance may remain unpaid at closing.
Approved installment agreements
No federal tax lien in your county
Non-QM after three plan payments
Government loan programs
Pending IRS plans at one program
State tax liens must be subordinated
The Lien Is The Dividing Line
Everything turns on whether the IRS has recorded a claim against property.
An installment agreement is an arrangement to pay over time. A tax lien is a recorded legal claim against your property. They are different things, and guidelines treat them very differently. The permission to leave a tax balance unpaid at closing is explicitly conditioned on the plan not carrying a lien on any property. Once a lien exists, the conversation shifts from whether the plan is current to whether the lien can be released, subordinated, or paid.
If you are not sure which situation you are in, that is the first thing to establish, and it is knowable. A tax lien is recorded publicly and generally shows up in a title search. Getting a title search early on a refinance, or a preliminary title report on a purchase, answers the question before it becomes a closing condition.
The second thing to know is that the plan payment counts against you. It goes into the debt calculation like any other monthly obligation, which reduces the loan amount you qualify for. That is not a reason to pay the plan off, necessarily, since the balance would come out of your down payment or reserves instead. But it is worth modeling both ways rather than assuming.
How to handle a tax balance during a loan
Each program sets its own rules for IRS plans, tax liens and payment history.
Get The Plan Approved Before You Apply
Guidelines require an approved installment agreement, not a pending request and not an informal intention to pay. A plan that is still being negotiated with the IRS is not documentation.
Do Not Miss A Payment Mid-Process
You have to be current on the plan as of closing. Underwriting will verify it. A payment missed between application and closing can undo an otherwise finished file.
Find Out Whether A Lien Was Filed
This is the single fact that determines the path. It is publicly recorded and a title search will surface it. Better to know in week one than in week five.
Bring The Plan Documents Up Front
The approval letter with the repayment terms, the required payment, and the total balance. Underwriting needs the actual document, not a screenshot of an account balance.
Plan Payment Counts In DTI
Fannie Mae counts the monthly installment payment as a debt instead of requiring payoff. One non-QM program uses the maximum payment under the plan when it figures your ratio.
Some Programs Want Payment History
At least one program allows the balance to remain unpaid only where there is a three-month history of payments on the plan. Establishing that history before applying is a small, concrete step that widens your options.
Hear From Homeowners Like You
Frequently Asked Questions
Questions from borrowers who owe back taxes.
Saxton Mortgage does. On a Fannie Mae conventional loan, the plan payment can be counted in your debts instead of paying the tax balance in full, as long as no Notice of Federal Tax Lien has been filed in the county where the home is, you are current on the plan, and at least one payment was made before closing. On FHA, you need at least three months of timely payments under the agreement, and you cannot prepay to reach three months.
No, Fannie Mae lets an IRS installment payment count as a monthly debt instead of a payoff when no Notice of Federal Tax Lien has been filed in the county where the home sits. You must be current on the plan, with at least one payment made before closing.
A payment plan is an approved schedule for repaying the IRS, while a Notice of Federal Tax Lien is a recorded claim. Fannie Mae requires the taxes paid in full at or before closing if a lien has been recorded in the property’s county, even with an approved plan.
Yes, FHA lets a tax lien stay unpaid if you have a valid repayment agreement and three or more months of scheduled payments made on time. You cannot prepay to reach the three months, and the agreed payment goes into your DTI.
An IRS payment plan adds its monthly payment to your debts, which lowers the loan you can qualify for. At one program, a plan still pending IRS approval counts the larger of your requested payment or the taxes owed divided by 72, and an approved plan counts when more than 10 months of payments remain.
Mortgage programs ask for one to three IRS plan payments: Fannie Mae needs at least one before closing, a non-QM investor’s rules call for two months of timely payments, and FHA needs three. Prepaid payments do not count at FHA or that non-QM program.
Fannie Mae wants delinquent taxes and tax liens cleared at or before closing; its installment plan exception covers federal income taxes. FHA lets a state or local tax lien stay with a repayment agreement and three months of payments if the lien holder subordinates to the mortgage.
Yes, though a VA lender we use bars any delinquent federal debt unless the account has been brought current or a satisfactory arrangement has been made. If your latest return shows federal taxes owed, that program may ask for proof of payment or of an IRS repayment plan.
Yes, in many cases. An approved IRS payment plan, which the IRS calls an installment agreement, can stay in place through closing when four things are true: you are current on it, the monthly payment is counted in your debt-to-income calculation, the approved agreement is in the file, and there is no tax lien recorded against any property. The lien is the dividing line. A recorded federal tax lien generally has to be paid off prior to or at closing, and that is a different conversation.
Conventional guidelines, including the Fannie Mae (FNMA) rules most conventional loans are underwritten to, allow the balance on an approved installment agreement to remain unpaid at closing as long as the plan is documented, you are current, the payment is counted as a debt, and no lien has been filed. In practice the FNMA IRS payment plan conditions are the same four listed above. Where programs differ is payment history: at least one requires a three-month history of payments on the plan, while others require only that you are current as of closing. A licensed loan officer confirms which applies to your file before you count on it.
Find out what you qualify for
Two documents answer almost every question here: your IRS installment agreement approval letter and a title search showing whether a lien was recorded. Send us those and we will tell you exactly where you stand before you spend money on anything.
Get Pre-QualifiedRequirements for tax repayment agreements vary by loan program and investor and are subject to change. Delinquent federal, state, and local taxes generally must be paid prior to or at closing unless specific installment agreement conditions are met, including that no lien has been recorded against any property. Saxton Mortgage does not provide tax or legal advice. Not all applicants will qualify. This is not a commitment to lend.