Tax Liens And Judgments Mortgage Guidelines And Lender Overlays

This Article Is About Tax Liens And Judgments Mortgage Guidelines And Lender Overlays

As we enter the 2021 income tax season, we are receiving more requests for information about tax liens. Each loan program will view tax liens differently. This will create confusion on the guidelines. Many consumers have still yet to file 2020 tax returns, which could be a problem when looking to obtain a mortgage. In this blog, we will detail how each loan product views federal tax liens. The information in this blog will provide insight on how to qualify for a mortgage even if you do owe back taxes. In this article, we will discuss and cover Tax Liens And Judgments Mortgage Guidelines And Lender Overlays

Qualifying For A Mortgage With Delinquent Federal Debt

I have once heard the phrase, the word “tax” is the ultimate swear word. In today’s political climate, the rate at which we should pay taxes is widely debated. Either way, it is clear, thousands of Americans owe the IRS back taxes. It is important to understand that there are two different types of back taxes. You can have delinquent Federal debt or an actual judgment (tax lien) filed against you.

Delinquent federal debt:

  • Many of our borrowers are currently delinquent on federal debt. (examples of federal debt
  • A government-backed mortgage (FHA, USDA, or VA), federal student loan, Title I Loan, ext.)
  • There may or may not be a lien secured by his or her property for any federal debt owed

If there is a lien revealed by the public record, credit report, or CAIVRS list, REGARDLESS of the AUS recommendation, ONE of the following must be met:

  • CAIVRS list must be cleared
  • The account must be brought current
  • Account paid off in full
  • A repayment plan is made between the borrower and Federal Agency

For more information on CAIVRS (CREDIT ALERT VERIFICATION REPORTING SYSTEM), please see HUD’s WEBSITE.

Mortgage Guidelines On Tax Liens And Judgments

Tax liens and judgments:

  • All tax liens and judgments filed against a borrower must be satisfied prior to closing, regardless of AUS findings
  • If you have been making regular AND timely payment on the Judgment or tax lien and the creditor is willing to subordinate the lien, the judgment or tax lien MAY remain open and not paid in full
  • A subordination agreement must be executed
  • The loan should be processed with the monthly payment included in your debt to income ratio
  • A letter of explanation must be provided if the credit report shows federal or state tax liens
  • This subordination can be very confusing for consumers
  • It is important to contact Gustan Cho Associates for more specific questions

We are the experts in mortgage guidelines around back taxes.

Tax Liens And Judgments Mortgage Guidelines On Government Loans

Tax liens and FHA, USDA, and VA mortgages:

Delinquent federal debt:

  • The federal debt may remain unpaid only if the borrower has entered into a valid payment agreement with the federal agency owed and has made timely and regular payments on the payment agreement
  • The borrower must have made at least three scheduled monthly payments
  • The borrower cannot prepay the scheduled payments to meet the three-payment requirement
  • Meaning this process cannot be instantaneous, you must make three on-time monthly payments before applying for the mortgage loan

The payment agreed upon must be included in the borrower’s debt to income ratio.

Agency Mortgage Guidelines With Outstanding Tax-Liens And Judgments

HUD, the parent of FHA, allows borrowers to qualify for an FHA loan with outstanding tax liens and/or outstanding balances owed to the Internal Revenue Service. However, you need to have a written payment agreement with the IRS and have made three payments to the IRS. You cannot prepay the three months upfront in advance to the IRS just for the sake of meeting the three payment rule. This holds true for both tax-lien and outstanding debts owed to the IRS. Fannie Mae and Freddie Mac do not allow tax lien on conventional loans. You can owe the IRS back taxes and still qualify for a conventional loan if you have a written payment agreement. One payment stated on the written payment agreement needs to be made to the IRS prior to closing on the conventional loan. Again, tax-lien are not allowed on Conventional loans. With VA, you need to have been in a written payment agreement with the IRS for at least 12 months if you have a tax lien. USDA loans qualification requirements in qualifying for a USDA loan with an outstanding tax lien and/or debts owed to the IRS are the same as FHA loans.

Qualifying For A Mortgage With Outstanding Judgments

Qualifying For A Mortgage With Outstanding Judgments

Agency mortgage guidelines on tax-liens are different depending on the mortgage loan program. Judgments are the worst derogatory credit tradeline a borrower can have when qualifying for a mortgage. The statute of limitations on judgments is normally 20 years but the creditor can renew judgments for another 20 years more than once. The statute of limitations on judgments depends on the state. However, most states have statutes of limitations on judgments for ten to twenty years. Again, judgment creditors can renew their judgments for more than one time. Therefore, judgments can haunt you unless you have addressed them.

Bankruptcy wipes out judgments. The other option is written payment agreements and/or settlements. All lenders require a written payment agreement set up with a judgment creditor for borrowers with outstanding judgments. Judgments need to be paid off at or prior to closing and recorded as paid on public records. Or the second option is to settle with the judgment creditor and settle the judgment. Need to record the settlement and zero balance due after the judgment has been settled. Or the third option is to make a written payment agreement with the judgment creditor and make three timely payments. You cannot pre-pay the three months upfront with the judgment creditor for the sake of qualifying for a mortgage.

Qualifying For A Mortgage With Outstanding Tax Liens

You may qualify for a mortgage with unpaid tax debts and/or tax-liens. However, you cannot qualify for a conventional loan with outstanding tax liens. You can qualify for a conventional loan with owing tax debts to the IRS with a written payment agreement and making one monthly payment prior to closing. HUD, the parent of FHA, allow borrowers with both a tax-lien and/or IRS tax debt to become eligible to qualify for an FHA loan with a written payment agreement and by having already made their monthly payments:

  • If the IRS or other Federal agency has a tax lien or judgment against you, they may remain unpaid if the borrower has entered into a valid payment agreement
  • Similar to what you just read above, the borrower must make regular and on-time payments for at least 3 months to the lienholder on FHA loans
  • Once again these may not be prepaid
  • Must be paid on time for at least 3 months
  • The difference here is, the lienholder must subordinate the tax lien to the FHA-insured mortgage

Meaning the title company must record the tax lien second to the FHA-insured mortgage. However, Fannie Mae and Freddie Mac do not allow borrowers with outstanding tax-liens to qualify for conventional loans. The tax-lien needs to be paid and/or settled in order for borrowers to qualify for conventional loans. Borrowers can qualify for conventional loans with outstanding IRS debts if and only if they can get a written payment agreement with the IRS. Only one month of monthly payment needs to be paid prior to closing on the conventional loan. Prior tax debts are alright on conventional loans BUT NOT tax liens.

Setting Up A Written Payment Agreement OnTax Liens And Judgments

How do you set up a repayment plan?

This process is quite simple. You simply call the IRS and set up the agreement. Make sure this payment agreement specifically states the total amount you owe and what your monthly payment will be. You must make three consecutive, on-time payments before you apply for the FHA loan. So, if your first payment is due on July 1st, the second payment is due on August 1st, and the third payment is due on September 1st, you can APPLY for the FHA mortgage on September 2nd. This process only works if your federal tax has resulted in a federal tax lien being filed. Please inform your loan officer upfront of your payment agreement so they may calculate that into your overall debt to income ratio.

Advice From GCA Mortgage Group

A tip from Gustan Cho Associates. Since we deal with IRS tax lien quite often, we have found a trick of the trade. You need to make three consecutive monthly payments before applying for a mortgage. But you can pay early. Using the example above, if your first payment is due July 1st, you may pay that as early as possible. Let’s say you pay it on June 2nd. You may then make your second payment to the tax lien on July 2nd and your third payment on August 2nd. You may then apply for a mortgage on August 3rd. You turn the three-month window into two months in a day.

Fannie Mae And Freddie Mac Guidelines On Tax Liens

Tax liens and Conventional mortgages

Tax liens and Conventional mortgages:

Fannie Mae has very specific guidelines on tax liens. When a borrower has entered into an installment agreement with the IRS to repay delinquent federal income taxes, the lender must include the monthly payment as part of the borrower’s monthly debts. The only way around this is if the lien is paid in full. The lender May allow the installment agreement only if:

  • There is no indication that a notice of federal tax lien has been filed against the borrower in the county in which the subject property is located
  • The lender must obtain the following documentation
  • An approved IRS payment agreement with the terms of the repayment must clearly State the monthly payment and total amount due
  • Evidence the borrower is current on the payments associated with the IRS repayment plan
  • Acceptable evidence includes the most recent payment reminder from the IRS, reflecting the last payment amount and date on which the payment was received

At least one payment must be made prior to closing.

Benefits On Conventional Versus FHA Guidelines On Tax Liens

This is the saving grace for conventional mortgages. Only one payment must be made before closing. A conventional loan is the fastest way to obtain a mortgage with a federal tax lien. Please remember if the IRS has filed a tax lien against you in the county where the property you are buying is located, you will need to pay off the entire lien prior to applying for a mortgage. You must obtain a lien release as proof this is paid in full. If no tax lien has been filed and you just owe the IRS money, using a conventional loan is easy. You will simply call the IRS and set up a repayment plan with them. Make sure they send you a full copy of the repayments plan and that it clearly specifies your monthly payment and how much is due. You will then send that payment agreement to your lender and make the required payment. This monthly payment will be included in your overall debt to income ratio but have little to no effect on your mortgage qualifications.

Qualifying For A Mortgage With Outstanding Tax Debts With A Lender With No Lender Overlays

The information above can be incredibly confusing. Please feel free to call Mike Gracz on 630-659-7644 for more specifics on your Federal tax issues. You may also email Mike Gracz at [email protected]. Many lenders add LENDER OVERLAYS regarding tax issues. Gustan Cho Associates do not have any overlays on all FHA, VA, and Conventional Mortgages. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

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