This BLOG On Qualifying For Home Loan With Tax Lien And Judgments Was UPDATED And PUBLISHED On July 8th, 2020
Qualifying for home loan with tax lien is possible but the tax lien issue needs to be resolved.
- If you owe the Internal Revenue Service money, it is highly recommended that you contact them and arrange a written payment agreement
- The IRS will be more than happy to work with you if you owe them money and make payment arrangements
- If you make arrangements with the Internal Revenue Service immediately, the IRS will not place a tax lien against you and will not report it to the credit reporting agencies
- However, if you ignore your past due IRS obligations, they will pursue collection actions against you and will not hesitate in reporting you on all three credit reporting agencies
In this article, we will discuss and cover Qualifying For Home Loan With Tax Lien And Judgments.
Mortgage Lending Guidelines On Collection Accounts And Qualifying For Home Loan With Tax Lien
Qualifying for home loan with tax lien, judgments, and collection accounts with balances is not a problem and can be done.
- Borrowers can qualify for mortgage loans with outstanding unpaid charged off and collection accounts
- FHA has similar lending guidelines on unpaid collection accounts and qualifying for home loan with tax lien as VA, USDA, and Fannie Mae and Freddie Mac
- With conventional loans, unpaid collection accounts may need to be paid or a payment agreement may be required on investment property loans
Agency guidelines allow lenders to approve borrowers with unpaid collection accounts, charge offs, and judgments on owner occupant home loans.
Types Of Collection Accounts
FHA categorizes collection accounts into two categories:
- Medical Collections
- Non-medical collections
With medical collections, FHA exempts all medical collection accounts no matter how much the unpaid balance is:
With non-medical collection accounts, FHA does not require to have an outstanding collection to be paid but a hypothetical monthly payment will be used on outstanding collections over $2,000:
- If the total unpaid collection accounts on non-medical collection accounts are greater than $2,000, then 5% of the unpaid collection account balance will be used to calculate borrower’s monthly debt to income ratios
- borrowers do not need to pay the 5% of the unpaid collection account balance
- it is just a hypothetical monthly payment used
The reason they do this is in the event if the unpaid collection account converts into a judgment.
Case Scenario Qualifying For An FHA Loan With Outstanding Collections
For example, if the unpaid collection account balance is $10,000:
- 5% of the $10,000 or $500 will be used as a monthly debt obligation to calculate the debt to income ratio
- this will be the case even though borrowers do not need to pay it
However, if the borrower can get a written payment agreement from the creditor, the monthly payment agreement will be used in lieu of the 5% of the outstanding collection balance.
What If Unpaid Non-Medical Collection Account Has Large Balance?
If the unpaid non-medical collection account has a substantially large unpaid balance, the 5% of the unpaid balance may disqualify borrowers due to the large monthly payment calculation on the unpaid collection account balance.
On cases like this, here is what borrowers can do:
- can enter into a written payment agreement with the collection agency
- whatever the monthly payment amount they negotiate, that payment will be used for debt to income calculations
On the above example:
- if the borrower has a $10,000 outstanding unpaid balance with the creditor and/or collection agency
- he or she can enter a written monthly payment agreement of a $200 per month payment
- that $200 monthly payment will be used as a monthly debt obligation instead of the $500 or 5% of the $10,000 unpaid collection account balance
Qualifying For Home Loan With Tax Lien And Judgment?
Qualifying For Home Loan with a tax lien and/or judgment, it is totally a different apple.
Tax liens and judgments need to be resolved either by having the following done:
- paid off completed
- or with a written payment agreement with the IRS or judgment creditor
To get a mortgage with a tax lien, borrowers need to get the following:
- a written payment agreement with the IRS
- show three months of canceled checks or bank statements reflecting the withdrawal being made from the bank account to the Internal Revenue Service
The balance of the tax lien does not matter as long as consumers are making the minimum payment agreement with the Internal Revenue Service:
- Can have a tax lien of $50,000 and be making a monthly agreed payment of $100 per month and that will be sufficient in qualifying for a mortgage with tax lien
- Same with an unsettled judgment
As long as consumers have a written payment agreement with the judgment creditor and have been making three months of payments with the judgment creditor, they are good to go.