Placing a tax lien against your property allows a county, state, or federal government to take possession of it if you fail to pay property or income taxes. The property can then be sold to recoup the amount of taxes that are due and owing. Show
This doesn't occur right away, however. The government taxing authority should send you several notices and bills for the taxes due before finally filing a tax lien against your property as a last resort. How To Prevent a Tax LienYou can prevent the IRS from filing a federal tax lien against you if you're able to pay the tax in full before the lien is filed. You can also prevent a lien by setting up a payment plan or installment agreement with the IRS if you're unable to do pay the tax debt in full in a single lump sum. It really just wants you to address your debt rather than ignore it. NotePaying in full as soon as possible is always a preferred option for taxpayers who want to protect their credit standing. The IRS offers a short-term payment plan if you can come up with the money within 180 days, as well as long-term installment agreement options. A tax lien won't be filed against you if you enter into one of these arrangements, provided that you don't default on payments. Liens Are Different From LeviesSome people use the words "lien" and "levy" interchangeably, but they're two quite different collection measures. A tax lien is a document that the IRS files with your local government to ensure its ability to collect the money owed. It prevents you from selling the property without the lien being paid from the proceeds, and the government can force the sale in order to be paid. A levy is the forced collection of taxes due, typically by garnishing your wages, salary, or bank accounts. Liens Are Public RecordsTax liens are public record because they're on file with your local government. They'll appear in the public records section of your credit report. They're considered to be one of the most negative credit report entries and they can damage your credit score as much as a bankruptcy or foreclosure. NoteA tax lien entry on your credit report can keep you from being approved for future loans, credit cards, apartment rentals, or even a job. The normal credit reporting time limit doesn't apply for unpaid tax liens. They can remain on your credit report indefinitely, but a credit bureau might remove it within 10 to 15 years, depending on their policies. Unfortunately, this is discretionary, not mandatory. Paid tax liens can remain for seven years unless they're withdrawn by the IRS, which should happen when the tax debt is paid. It's almost like the lien was never filed in the first place when it's withdrawn. No hint should appear on your credit report, but mistakes can happen. You might have to send the credit bureaus proof of the tax lien withdrawal in order to have it removed from your credit report. Tips for Removal From Your Credit ReportYou can have the lien withdrawn and removed after you've satisfied the tax obligation if it was filed by the federal government. The IRS indicates that it will release the lien within 30 days after your tax debt is paid off. NoteYou must have filed your tax returns for three previous years to qualify for the 30-day removal, or you must show that you weren't required to file according to federal rules. You must also be current on any estimated taxes and federal tax deposits you might owe. Certain taxpayers might also be able to have the tax lien withdrawn by entering into a direct debit installment agreement with the IRS. This allows them to automatically withdraw regular tax payments from your bank account at scheduled intervals. You must owe $25,000 or less to qualify, and have made at least three consecutive payments. Other rules also apply. Your state might offer a similar tax lien withdrawal procedure, but you'll have to contact its Department of Revenue to find out what the procedure is and how you should apply. The tax lien will most likely follow the normal credit reporting timeframe if it's paid in the absence of a process for tax lien withdrawal. Consider consulting a tax professional about the best way to proceed if you're having issues with a tax lien to ensure that all procedures are followed correctly. Can You Buy a House If You Owe Taxes?If you owe taxes, it may be harder for you to get approved for a conventional mortgage. Getting approved for a mortgage in this situation has less to do with the IRS and more with the individual lender. FHA loans can be more forgiving of tax debt if you can prove you have a plan to pay it off. Tax debt affects your debt-to-income ratio, which many lenders look at during the application process. 
Fact Checked Annuity.org partners with outside experts to ensure we are providing accurate financial content. These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times. Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism. Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments. Cite Us APA Schell, J. (2022, September 20). Can You Buy a House If You Owe Taxes? Annuity.org. Retrieved October 24, 2022, from https://www.annuity.org/personal-finance/taxes/can-you-buy-a-house-if-you-owe-taxes/ MLA Schell, Jennifer. "Can You Buy a House If You Owe Taxes?" Annuity.org, 20 Sep 2022, https://www.annuity.org/personal-finance/taxes/can-you-buy-a-house-if-you-owe-taxes/. Chicago Schell, Jennifer. "Can You Buy a House If You Owe Taxes?" Annuity.org. Last modified September 20, 2022. https://www.annuity.org/personal-finance/taxes/can-you-buy-a-house-if-you-owe-taxes/. What Types of Tax Debt Are There?Most working Americans have a tax liability, which refers to the amount of taxes you owe to the government. If the amount you’ve paid in taxes is less than the total amount you owe, that means you have tax debt. You can have debt related to federal income taxes or state taxes. Of the two, state tax debt is considered a more serious risk for the average taxpayer because it tends to last longer than federal tax debt. The IRS has a 10-year statute of limitations on collecting liability, but each state sets its own statute of limitations for tax collections – for some states, it can be up to 20 years. According to LendEDU, the average tax debt was $16,849 in 2019. This tax debt can be caused by a few factors. Common Causes of Tax Debt Owing More Than Expected When taxpayers file their return, they may find that they owe more in taxes than they budgeted for. This can be a result of many factors, including changes in tax law. For example, Americans who received Advance Child Tax Credit payments in 2021 may find that they must pay back a portion of the credits due to differences in how the eligibility for the credit is calculated.Back Tax Penalties As tax debt accumulates over time, it becomes more and more difficult to pay off due to back tax penalties and accrued interest from the IRS. If you can’t pay the entire tax debt, you should try to pay as much as you can to reduce the penalty and interest amounts.Unfiled Taxes When taxpayers are not able to pay their tax bills, they may avoid filing their tax return altogether. But avoiding the IRS and postponing resolution of your tax debt only makes the problem worse because of the back tax penalties.Can You Get a Mortgage with a Tax Lien?“It is possible to buy a house if you owe taxes,” says Ebony J. Howard, a certified public accountant. “However, if the tax debt transitions into a tax lien, this may hinder your chances of being approved by a lender for a loan.” A tax lien is a legal claim to your property the government can place when you fail to pay your tax debt. If you do not pay your taxes in time after the IRS has assessed your tax liability and sent you a notice and demand for payment, the lien is placed on your property. Having a tax lien on your home can complicate the selling process. If there is a federal tax lien on your home, you must satisfy the lien before you can sell or refinance your home, according to the IRS. If you have equity on your home, you can satisfy the lien with funds from the sales proceeds at the time of closing. Or, if the selling price of your house is less than the value of the lien, you can request a discharge of the lien from the IRS so you can complete the sale. When it comes to buying a house, tax liens can make mortgage lenders hesitate to approve your home loan. “Mortgage lenders regard tax debt as a serious matter that takes precedence over other types of debts,” Howard says. Paying back money to the IRS is generally a higher priority for the borrower than paying their mortgage debt to the lender. “Lenders want full confidence that you will repay the loan,” says Howard, “[so] most will not even consider a mortgage application if the applicant owes the IRS.” If you owe tax debt but want to be considered for a mortgage, you must either pay the debt in full or be able to prove that you have an agreement with the IRS and are in the process of paying back the debt. How Do Lenders Know You Owe Taxes?Most lenders will request that you provide one to two years of tax returns when you apply for a home loan. Howard says lenders also check credit information, which can show if the borrower owes federal tax debt. Tax liens do not show up on credit reports, but lenders will usually perform a public record search to verify that the borrower does not have a tax lien placed on them. Join Thousands of Other Personal Finance Enthusiasts Because missing out on important news and updates could cost you. Can You Get an FHA Loan if You Owe Taxes?If you’re having trouble getting a conventional home loan due to tax debt, you might apply for an FHA loan. FHA loans are mortgages distributed by private lenders but are regulated and insured by the Federal Housing Administration. These loans are designed for low- to moderate-income prospective homeowners and are typically easier to qualify for than conventional loans. FHA loans allow for lower down payments and approve applicants with lower credit scores than conventional loans.
If you owe debt to the IRS, getting an FHA loan may be more difficult, but it’s not impossible. You’ll have to go through a manual underwriting process in which a human underwriter looks at your application instead of an automated underwriting computer program. This way, you may be able to get approved if you can show your lender that you have a repayment agreement with the IRS and have made the payments for this plan on time for at least three months. What Is Debt-to-Income Ratio?The debt-to-income (DTI) ratio gives lenders an overall view of your personal finances and helps them anticipate how much you can afford to pay each month. Mortgage lenders consider this one of the most important factors in approving home loans. Most lenders require an applicant’s DTI ratio to be at or below 43% to qualify for a conventional mortgage. Here is an example of what a DTI ratio may look like. If you make payments of $400 a month towards student loans and you are applying for a mortgage that would have a $1,200 monthly payment, your total monthly debt would be $1,600 a month. With a gross monthly income of $4,000, your debt-to-income ratio would be 40%. You can also calculate your DTI ratio manually by adding up all your monthly debt payments and dividing the sum by your monthly gross income. Monthly debt payments may include car loans, student loans, tax debt and the prospective monthly payment of the home loan. Advertisement Connect With a Financial Advisor InstantlyOur free tool can help you find an advisor who serves your needs. Get matched with a financial advisor who fits your unique criteria. Once you’ve been matched, consult for free with no obligation. Please seek the advice of a qualified professional before making financial decisions. Last Modified: September 20, 2022
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Can you buy a house with a state tax lien on your credit
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