Can You Buy A House With A Tax Lien

For the last 30 plus years I’ve been a Lender we could not make a loan to anyone who had a tax lien attached to their credit report.  But what if it isn’t a lien, what if you just OWE the Federal Government money?  Can you buy a house with a tax lien, or a tax liability?

The PROBLEM with owing taxes and buying a house, is that you can’t get Title Insurance.  I’ve been reading all of the questions on various forums, and consumers are saying you CAN buy a house with a Tax Lien, and Lenders are saying you can’t… but no one is looking at the obvious problem.

In North Carolina, we need Clear Title, for Lender’s Title Insurance coverage.  In most cases, if we don’t provide the Title Company with proper documentation that the Lien is being paid under a payment plan, they don’t want to issue a policy with an exception.  Meaning they don’t want to guarantee that the lien on the property from our mortgage will take first position (which it must for us to be able to sell the mortgage). 

The Tax issue clearly happened before you take out the mortgage on the home – so the logical conclusion is that the Federal Government would get paid first when the home is sold.  The mortgage has to take the first lien position, so that when you sell the home, the mortgage gets paid and THEN anyone else who is owed money, will be paid. For instance if you had a second mortgage, or a mechanics lien because you didn’t pay someone for fixing your roof, or your plumbing.

Can you buy a house with a tax lien, or a tax liability?

Fannie Mae is making some changes to their guidelines to be a little more lenient.  FHA has long allowed us to make a loan to folks who owed taxes to the IRS and were on a payment schedule, having proof that you made at least 3 payments on time.  We need a letter from the IRS, and cancelled checks or bank statements proving the terms of the payment and that they were made on time.

Fannie Mae will now allow the monthly payment due under an IRS income tax installment agreement to be included in the DTI ratio.  So when we are calculating how much home you qualify for, we are taking that monthly payment and treating it like a car payment.  Previously we had to show that the taxes had been paid in full.

Fannie Mae also requires that the following requirements are met:

• 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 installment agreement with the terms of repayment, including the monthly payment amount and total amount due; and
  • evidence the borrower is current on the payments associated with the tax installment plan. Acceptable evidence includes the most recent payment reminder from the IRS, reflecting the last payment amount and date and the next payment amount owed and due date. At least one payment must have been made prior to closing.

So, unlike FHA who wants to see that 3 months have been paid on time, Fannie Mae only requires one payment to be made prior to closing.

We’ve been told that with this documentation, we can get proper Title Insurance on the home.  Why do we need Title Insurance and what does it do?

Well, there’s a risk for the lender (as I’ve said) anytime someone is going to buy a house in North Carolina with a tax lien on the borrower.  A change in land ownership, requiring a formal transfer of title involves risk that the title may be “defective.”

“Title insurance is your guaranteed protection against real estate title losses. Actually, title insurance is one of the best insurance values available. The premium you pay is based on the purchase price of your property. Rates are regulated by the state, and you only pay a one-time premium when you purchase your policy. North Carolina property owners enjoy rates for title insurance premiums that are among the lowest in the nation. This coverage lasts as long as you own your property, and will protect you even after you sell your property. “

If you want to know the answer to the question, “Can you buy a house with a tax lien, or a tax liability?” call Steve and Eleanor Thorne 919 649 5058.  Each situation will be a little different, so I hate to give out complete and total assumptions without knowing all of your story  Folks don’t just wake up one day and decide not to pay taxes.  There’s a miscalculation, or a problem that was unavoidable.  We want to help you buy your next home in North Carolina!