Latest Facts and News:
- The IRS has expanded eligibility for its payment plans in 2023
- Fannie Mae now allows borrowers with IRS repayment agreements to qualify for conforming loans
- Recent changes in mortgage lending practices are more accommodating to those with tax debts
- The COVID-19 pandemic has led to increased flexibility in mortgage approvals for those with tax issues
Did you know that 1 in 6 American taxpayers owe back taxes?
If you happen to be among that statistics, the idea of having a house may look like an unachievable dream. However, the truth is quite different.
While it is true that lenders carefully consider financial obligations like IRS payment plans, just because you have one in place doesn’t automatically spell rejection.
So, does IRS payment plan affect mortgage? Absolutely, but not in the way you might think. Stick around till the end to know more about what a lender could do in such a case!
Understanding IRS Payment Plans and Mortgage Applications
When individuals face tax debt, many choose IRS payment plans to manage their financial obligations. But does IRS payment plan affect mortgage? Yes, it can.
An IRS payment plan allows you to settle your tax debt over time rather than paying it in full immediately, helping you avoid severe IRS collection actions like liens or wage garnishments. However, mortgage lenders consider this debt when evaluating your application.
How do IRS Payment Plans Work?
IRS payment plans enable taxpayers to resolve their tax liabilities through manageable monthly installments rather than a lump-sum payment.
Key Points to Remember:
- Terms of Agreement:
- Tax debts are divided into affordable monthly payments.
- You must remain current on all future tax filings and payments.
- Setup Fees:
A one-time setup fee applies, varying by payment method (lower fees if choosing direct debit). The IRS may offer reduced fees for low-income taxpayers. - Adjustable Payments:
Plans can typically be adjusted if your financial circumstances change, allowing flexibility to accommodate your current financial situation. - Consequences of Missed Payments:
Missing payments or failing to file required future returns can result in plan cancellation and immediate IRS collection actions, including wage garnishments or bank levies. - Eligibility:
Most individuals owing less than $50,000 can readily qualify for installment plans, while different limits apply for businesses.
Does IRS Payment Plan Affect Mortgage Approval?
Yes. Mortgage lenders carefully examine your outstanding IRS debts because:
- It affects your Debt-to-Income (DTI) ratio.
- It may lead lenders to request proof of at least 12 months of timely payments.
- It can influence your interest rates or loan terms, especially if the IRS has filed a lien.
To maintain a healthy mortgage application while on an IRS payment plan:
- Consistently make IRS payments on time.
- Keep clear records of all payments for lenders to verify your reliability.
- Address potential issues proactively by consulting a professional who understands tax-related mortgage applications.
Types of IRS Payment Plans
If you are in an IRS payment plan, you may wonder how it impacts your ability to get a mortgage. But remember that different payment plans have different rules and arrangements.
Short-Term Payment Plan (120 days or less)
- Eligibility: The scheme targets taxpayers who have $100,000 or less due, including all penalties and interest, and are able to pay within 120 days Payment Terms Pay in full within 120 days.
- Interest & Penalties: Keep on piling up till the debt is paid.
- Fees: No setup fee.
- Best for: Those who pay tax are in a position to clear their debts promptly and are not concerned with the long-term payment plan costs.
Long-Term Payment Plan (Installment Agreement)
- Eligibility: This is reserved for taxpayers who owe $50,000 or less with penalties and interest and will be able to extend the pay period up to 72 months.
- Payment Terms: Paying over a long period with amounts available to increase the payments to clear all debt more quickly.
- Interest & Penalties: Accrue, but at a smaller rate than in case of non-payment.
- Setup Fees: Ranges from $31 to $225 depending on the payment method and the type of agreement.
- Best for: Taxpayers who need more time to pay their debt and are unable to pay it all at once.
Partial Payment Installment Agreement (PPIA)
- Eligibility: For people who owe more than they can pay. It does require a showing of financial hardship.
- Payment Terms: It’s a smaller monthly payment based on the taxpayer’s ability to pay.
- Interest & Penalties: They continue to accrue, but are lower in this plan than in all other plans.
- Setup Fees: $225 if direct debit is not used to set up; lower if using direct debit.
- Ideal For: Taxpayers who cannot pay the amount owed in full but still want to avoid default and collections.
Once you know these types, you can decide how much you can pay and if you need to mortgage to buy a new home or get expenses met.
| Can I Buy a House If I Owe the IRS? If you ever asked, does IRS payment plan affect mortgage, then probably you are thinking of buying a new house. Well, it is possible to buy a house when owing the IRS, but that’s relatively more difficult. Lenders always consider your financial condition and the amount you owe to the IRS while giving a mortgage. If you pay behind in back taxes, there is a potential negative impact on your credit rating and thereby your ability to borrow. |
Factors Lenders Consider
You have tossed and turned, wondering, “Does IRS payment plan affect mortgage?” but the answers seem implausible. What if we tell you that having an IRS payment plan does not automatically exclude you from mortgage approval? Lenders consider several very important factors to assess whether you qualify.
- Credit Score: Your credit score plays a significant role in mortgage approval. Tax debt can affect your score, so it’s important to ensure it’s in a good range to improve your chances.
- Payment History: Lenders will look at your IRS payment plan history to see if you’ve been making consistent and timely payments. A reliable payment history can signal to lenders that you’re financially responsible.
- Debt-to-Income Ratio (DTI): is an important factor here; lenders judge how much of the income goes towards servicing debt. Your IRS payment plan increases your monthly debt, raising your debt-to-income ratio, which can reduce your chances of mortgage approval.
- IRS Payment Plan Terms: Your IRS payment plan terms, including monthly payment amounts and length, will be reviewed. If your payment plan is manageable and reasonable, this can be an advantage.
- Total Tax Debt: The amount of tax debt owed is another possible concern. A large amount of debt can make lenders nervous, but small, manageable levels of debt do not pose a significant problem.
- Asset and Income Stability: Lenders will also review your overall financial situation, including stable income and assets, to determine your ability to repay the mortgage, even with existing tax obligations. Impact of IRS Payment Plans on Mortgage Approval
There are various ways that an IRS payment plan might affect the approval of your mortgage. Sometimes, once you’ve paid off your tax debt by cooperating with the IRS, your debt-to-income ratio, credit score, and financial stability become factors of issue. Thus, understanding how all these effects work could make you more prepared when the application time rolls around.
Effect on Debt-to-Income Ratio
One of the things that most mortgage lenders consider is your debt-to-income, or DTI, ratio. That is your ratio of monthly debt payments to your monthly gross income. The IRS payment plan will be considered a monthly obligation in this calculation. For instance:
- With an IRS Payment Plan: If your monthly is $500 to the IRS, that will be included in the total monthly debt, further increasing your DTI ratio.
- Without an IRS Payment Plan: Your DTI ratio is probably lower without an IRS payment plan, which should help you qualify for a mortgage.
Sample DTI Calculation:
- Without IRS payment: Monthly debt ($1,000) / Monthly income ($5,000) = DTI ratio of 20%
- Using IRS Payment Plan: Monthly Debts ($1,500 including IRS payments)/Monthly Income ($5,000) = DTI ratio of 30%
Lenders like a DTI ratio under 43% for qualification purposes on most loan types, so higher debt obligations because of an IRS plan can make approval more difficult.
Credit Score Implications
An IRS payment plan can affect your credit score in so many ways that we cannot even count on them, but here is a catch: the IRS does not report information to credit reporting agencies. The actions related to your tax debt can still have an impact, like:
- Initial Impact: If you are not paying your taxes lately, your credit rating has already suffered because of the liens and the outstanding tax debts. But what is a bonus point here is that if you get into the IRS payment plan, you can put an end to the above-given consequences once and for all. All this will ultimately lead to a good credit score in the long run.
- During the payment plan: Provided you are in good standing with payments as agreed to, your credit could improve steadily, particularly if you have substantial tax debt compared to other years. Failure to make IRS payments will, in turn, deteriorate your credit over time.
- Post-Payment Plan: After the debt is paid off or completed successfully, the credit score will reflect that the outstanding tax debt is no longer a part of your financial profile.
Timeline of Potential Credit Score Changes
How your credit score could vary at different stages in the life of an IRS payment plan:
- Before IRS Payment Plan: Tax liens or past-due taxes may lower your score significantly.
- During IRS Payment Plan: Regular payments can prevent further damage and help restore your score, but the debt itself may still impact your credit.
- After Payment Plan Completion: A clean slate may help rebuild your credit, though it may take time for the tax debt to be fully reflected in your credit score.
Overall, it’s important to be proactive in maintaining a positive payment history on your IRS plan to minimize any negative impact on your credit and mortgage approval prospects.
The number one tip for real estate purchases is to speak to a mortgage professional. They can save you lots of time and money through the correct configuration of your payment plan and relevant financial tools.
Strategies to Improve Mortgage Approval Chances
Here are some easiest ways you can use to improve the chance of mortgage approval:
- Stay Current on IRS Payments: Ensure that you are making timely payments with the IRS. Lenders will want to see the ability to manage payments responsibly.
- Save A Lot for a Down Payment: Down payments have a direct relationship with money matters-the higher the amount, the better it will be for you. Saving at least a down payment of 20% may trigger better reactions from lenders regarding your loan application.
- Work On Your Credit Score: An IRS payment plan will affect your credit score initially, but as you work on fixing errors within your credit report or pay off other debts, you should start seeing some improvement in it. The better the score, the easier the accessibility to approve a loan.
- Decrease Your Other Debts: As part of the move to cut down on current debts, pay off other debts, such as the balance owed on credit cards. The lesser debts one has, the better chance he stands with regard to gaining a mortgage.
| Your effort may be reduced if you consider approaching the IRS in case you find your IRS payment plan too difficult for mortgage approval. In fact, you can even lower your monthly payments. Mortgage lenders usually prefer that you have room in your budget since that makes it easier to qualify. |
Wrapping Up!
Everyone thinks of buying a home that they can call their own, and it is tough if you are on an IRS payment plan. But it is not an impossible thing, as it may sound. If you make proper payments, work hard on improving the finances, and find the best ways to negotiate on better terms, you are getting approval from your lender for the mortgage.
And if this sounds too much for you in one go, Mr. Michael Sulivan is always here to help. He has done this for many of the Americans, and so he can help you also.
FAQ's
Most lenders would consider it such if you were paying regularly for the past 12 to 24 months. That just makes you look serious and responsible for handling your outstanding debts very well.
Yes, you may refinance your home even if you’re currently paying on an IRS payment plan with tax debts. However, lenders generally review your current debt-to-income ratio and your credit score as well before approving the loan.
This is true; being on a list of IRS payment plans does not directly affect the closing cost. However, it will have a very significant role in determining the loan terms for instance the down payment or the interest rate you might qualify for.
Because it reduces tax liabilities, the compromise offer improves the debt-to-income ratio-the most critical factor in deciding whether to approve or deny the application for a mortgage by lenders.
Yes, absolutely you can. one can definitely use a co-signer. Having a co-signer with a solid financial profile will significantly impact the decision to approve or deny his application. His approval will offset much of the adverse effects coming from the tax debt you currently have.
