Buying a home can be a complicated process. Whether you started the process by looking at homes or by attempting to be preauthorized for a mortgage, at some point you’re going to find yourself in front of a loan officer, having all of your financial information looked over. As a part of this loan approval process (which can be different than a preauthorization), the loan officer is going to do a deep dive into your financial past and will need to see your tax returns. With that being said, if you have not filed them for several years, this could be quite a hurdle.
Lenders Require Tax Returns as Part of the Mortgage Process
In order to qualify for a mortgage, the lender that you choose is going to require quite a bit of financial paperwork. They’ll need copies of your bank statements, your W2s for the past few years, and even your past tax returns. On top of this, the lender will pull your credit report and go over it in depth along with your financial documents to see if you qualify for a mortgage.
Why will they need your tax returns as well as your W2s? Simply put, banks need to verify your income. While your W2 includes information about how much you were paid in the past year, your tax returns are where the real truth comes into play. They include everything from income on investments, business losses (depending on whether or not you’re a sole proprietor or shareholder in an S-corporation), and other information that paints a full picture of your finances. Therefore, in order to see just how much you make, banks want to see your tax returns.
If you haven’t filed your tax returns for several years (banks usually only go back 2 years when putting together the information for your mortgage loan application), you may not be able to qualify for a mortgage. Before you begin the loan approval process, go through your financial records with an expert and send in those returns. Otherwise, you may find yourself unable to get a loan for your dream house, leaving you stuck in your current home.
Of course, there could be other issues at play as well, such as unpaid taxes, tax liens, and other things. However, those are dealt with in separate ways.
You Might Have Unpaid Taxes on Your Credit Report
Another problem arises when unpaid taxes appear on your credit report. Even if you’ve filed the previous year’s tax returns, this doesn’t mean that you don’t owe the IRS money. For a plethora of reasons, you may have filed those returns, but not sent in the money that you owe, or you may have found out later on, after an audit, that you owe additional money that you haven’t yet paid. Either way, these unpaid taxes can appear on your credit report and affect whether or not you can qualify for a mortgage.
Thankfully, you may be able to get a mortgage from the bank of your choice, as long as:
- Their Policies Don’t Prevent It – Some banks have a policy against providing mortgage loans to people who owe money to the IRS. Once the debt appears on your credit report, you’ll be turned down for a mortgage. However, other banks don’t have this policy in place, or go on a case-by-case basis. In these situations, as long as your other financial records are in order and the other two items on this list are in place and acceptable, then you may still be able to qualify for a mortgage.
- You Have a Payment Plan in Place – If you have a payment plan in place with the IRS, then a bank will view you more favorably. These plans show that you’re taking the active steps needed to pay off your back taxes, and make it more likely that you’re a responsible borrower worthy of a mortgage loan. Even if your debt with the IRS appears on your credit report, as long as you have a payment plan in place with them, your standing will go up in the eyes of your bank.
- Your Overall Debt to Income Ratio Isn’t High – One thing that banks look at when deciding who qualifies for a mortgage loan and who doesn’t is a debt-to-income ratio. These numbers compare your debts (as seen on your credit report) with your overall income. Since the bank taxes that you owe to the IRS appear on your credit report, they are considered a part of your debt-to-income ratio. Although the overall ratio that banks prefer can vary based on the institution, you generally want to show that you have much more income than debts so that you can afford the mortgage payments.
All three of these things are considered by lenders. However, their overall policies and procedures can vary quite a bit, depending on the bank, so it’s hard to say how much of a factor having back taxes on your credit report can be. With that said, as long as you’re taking the steps to pay the IRS and have a good debt to income ratio, then things may work out more in your favor. It all depends on your overall worth as a borrower and what those tax returns show, such as your total income and investments.
Is There a Tax Lien on Your Current Home?
If you have back taxes and have avoided paying them for some time, there may be a tax lien on your current home. What happens if you want to sell that home while in the process of buying a new one? Well, you could end up having to deal with several roadblocks.
One, you will not be able to sell the home that has a tax lien on it until that lien is removed. This can be a lengthy process, because you not only have to pay your debt with the IRS in full, but also petition to have the lien removed once the debt is paid. They do not automatically remove the lien, or at least, will not remove it in time for you to sell that house and purchase a new one.
Two, although you may qualify for a mortgage on a new home with a tax lien on the old one, the process gets a bit trickier. The lender will look at your payment record with the IRS to ensure that you’re making those payments on time, and they will also consider whether or not you can afford a mortgage on your new home while still paying the mortgage on the old one. This means that your debt-to-income ratio must be excellent, and you must have enough extra money to pay both the new mortgage and your current debts (particularly the IRS and other mortgage) easily.
As you can see, this process can be complicated, and it depends quite a bit on how the lender’s policies are set up. Some may not be able to work with you at all, while others can, as long as all of the other pieces fall into place. In the end, you may be able to get a mortgage while there’s a tax lien on your existing home, but you may not.
Is It Possible to Buy a Home If You Owe Back Taxes?
While there are a number of different factors involved in answering that question: is it possible to buy a home if you owe back taxes, there are some things you can do in order to prepare for applying for a mortgage loan.
- File Your Taxes – Several months before you intend to start the mortgage loan process, work with a professional tax preparer to file your past tax returns. If you can, pay any amounts owed to the IRS at the same time.
- Set Up a Payment Plan with the IRS – If you currently owe back taxes, now is the time to get a payment plan into place. Most lenders (those who will work with you if you owe the IRS money) will require proof of several months of reliable payments in order to even consider your application.
- Make Sure There Are No Tax Liens on Your Property – Those who have previously paid off back taxes with the IRS may still have a tax lien on their property. Check your county’s records and if you see any signs of an existing tax lien, go through the steps to have it removed.
Contact Us Today
If you are trying to purchase a home and have yet to file tax returns for the past several years, then reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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