Can You Buy a House If You Owe Taxes?

Buying a home is always extra exciting—you’re picturing your dream space, planning the move, and imagining what life will be like once you finally have a place to call your own. But then, out of the blue, you sit down to think: Can you purchase a home if you owe the IRS?

Owing taxes doesn’t mean homeownership is off the table, but it does make things a lot more difficult. Lenders take unpaid taxes seriously, and if there’s a tax lien on your record, your homebuying plans could be stalled indefinitely. Even without a lien, having a large tax debt can raise red flags for lenders, making approvals harder—or even leading to rejection.

The good news? How resolving IRS debt before buying a house can improve your chances of mortgage approval and make the process much smoother. Keep reading to find out what steps you can take to move forward with confidence!

Understanding IRS Tax Liens and Their Impact on Home Buying

An IRS tax lien is a legal claim the government places on your property when you fail to pay your taxes. 

It secures the government’s right to collect the debt by attaching to your assets, including real estate, personal property, and even future financial assets.

Impact of Tax Lien on Home Buying Process

A tax lien creates financial and legal challenges that need to be dealt with before you can move forward. Let’s have a look:

1. It Lowers Your Credit Score: A tax lien is recorded on your credit report and reduces your credit score. This makes it harder for you to get approved for a loan to buy a home. Lenders see a low credit score as risky.
2. Lenders Might Refuse to Lend You Money: When lenders see a tax lien, they assume you might struggle to pay your debts. Because of this, some lenders might deny your loan application or offer less favorable terms.
3. Liens Can Stay with the Property: If the home you want to buy has a tax lien on it, you might need to pay off the lien before the purchase can go through. This adds extra costs and can slow down the process.
4. You May Have Trouble Getting Title Insurance: Title insurance protects you from issues with property ownership. If there’s a lien on the property, you might not be able to get this insurance. Without it, you can’t complete the purchase legally.
5. It Can Delay Buying the Home: Sellers or lenders may ask you to prove that the lien is being paid off or resolved. This can take time and cause delays in closing the deal.
6. The Government’s Claim Comes First: A tax lien means the government has first rights to the property. This can make the buying process more complicated because the lien must be resolved before ownership can transfer to you.

Options for Buying a House with IRS Debt

Here are some home purchase options with tax debt:

1. IRS Payment Plans

Setting up IRS payment plans for homebuyers shows lenders that you are responsibly managing your tax debt. This step can increase your chances of getting mortgage approval with IRS debt.

• Installment Agreement: You make fixed monthly payments to reduce your debt over time.
• Short-Term Payment Plan: If your tax debt is relatively small, you can pay it off within a few months, improving your financial profile quickly.

Lenders feel more comfortable working with buyers who have a plan in place to resolve their debts.

2. Lien Subordination

Lien subordination allows the IRS to give your mortgage lender priority over their federal tax lien. This means the lien still exists but won’t block your ability to get a loan. It’s a way to help you qualify for a mortgage while managing IRS debt.

How to Apply for Lien Subordination?

1. Complete Form 14134: Fill out the IRS application form for lien subordination.
2. Attach Required Documents: Include your tax lien details, proposed loan agreement, property information, and proof of why subordination benefits both you and the IRS.
3. Mail Your Application: Send the form and documents to the IRS Advisory Consolidated Receipts Office.

1. Submit Early: Send your application at least 45 days before the date you need the lien subordination.
2. Wait for Approval: The IRS will review your application and provide a decision.

Why Does It Help Homebuyers?

• Lenders Feel Safer: The lender gets priority, so they are more likely to approve your loan.
• You Keep Moving Forward: You can proceed with buying your home without having to fully pay off the lien immediately.

By securing lien subordination, you can balance managing your tax debt while achieving your goal of homeownership.

3. FHA Loans

If you have IRS debt, FHA loans can still be an option to buy a home. These loans are backed by the Federal Housing Administration and are designed to help people with financial challenges, like lower credit scores or tax debt, get approved for a mortgage.

How Do FHA Loans Work for Buyers with Tax Debt?

You can qualify for an FHA loan even with tax debt if:

1. You’re on an IRS Payment Plan:
   • You must have a valid repayment agreement with the IRS.
   • You need to make at least three on-time payments before applying for the loan. Pre-paying doesn’t count, payments must follow the schedule.
2. The IRS Lets You Delay Payments:
   • If the IRS gives you permission to delay payments on your debt, you may still qualify for an FHA loan.

What Lenders Will Check?

FHA-approved lenders will:

• Confirm you’re meeting IRS repayment requirements.
• Check public records and your credit report to ensure there are no unresolved tax issues or delinquent payments.

How do FHA Loans Help?

• You Don’t Have to Pay Off Everything First: Tax liens don’t need to be fully paid off as long as you’re following the IRS repayment plan.
• Flexible Requirements: FHA loans allow lower credit scores and smaller down payments, making it easier for buyers to manage tax debt.

FHA loans give you a clear path to buy a home while handling your IRS debt. By staying on top of your repayment plan, you can move closer to owning your dream home.

4. VA Loans

VA loans are a great option for veterans and active-duty military members, even if you have tax debt. These loans come with helpful benefits like no down payment, no private mortgage insurance (PMI), and limited closing costs.

How Do VA Loans Work for Buyers with Tax Debt?

• Repayment Plan Matters: Enter an IRS repayment plan and make timely payments for at least 12 months to show lenders you’re financially responsible.
• Debt-to-Income Ratio (DTI): Your IRS repayment amount will be included in your DTI, which may reduce the loan amount you qualify for.
• Manual Underwriting: If you have a tax lien, you’ll need to disclose it on your loan application. This may lead to a more detailed review of your finances by the lender.

How Do VA Loans Help?

• No Down Payment: Buy a home without saving for a down payment.
• No Private Mortgage Insurance: Reduce your monthly costs by avoiding private mortgage insurance.

VA loans make it possible for eligible veterans to buy a home while managing tax debt, as long as they follow a structured repayment plan.

5. Seller Financing

Seller financing is a flexible option for buying a home, even if you have IRS debt. Instead of going through a bank or traditional lender, the property seller acts as the lender, giving you more opportunities to secure a home.

How Does Seller Financing Work?

• No Traditional Loan Approval Needed: You don’t need to go through the lengthy process of securing a loan from a bank. This means your IRS debt or credit score won’t necessarily block you from buying a home.
• Flexible Terms: Sellers and buyers negotiate terms like the down payment, interest rate, and repayment schedule. This makes it easier to work out a deal that fits your financial situation.
• Lower Costs and Faster Closing: With no bank involvement, you save on loan fees and appraisals, and the process can close much faster.

Why It’s a Good Option for Buyers with IRS Debt?

• Credit Challenges Are Less of a Barrier: If your credit or debt-to-income ratio is affected by IRS debt, seller financing can provide a path to homeownership.
• Focus on Your IRS Repayment Plan: Since seller financing is more flexible, you can continue managing your IRS payment plan while buying a home.

Seller financing opens the door to homeownership for buyers who might struggle with traditional financing due to IRS debt. By negotiating directly with the seller, you gain the flexibility needed to work toward your goals.

Also Check Out → Insurance Planning Services for Your Financial Security

Strategies to Improve Your Chances of Buying a Home

Falling behind on taxes happens to many people, but it doesn’t have to stop you from achieving your goal of buying a home. Here is a simple checklist to help you move forward:

1. Find Out How Much You Owe

• Check how much tax debt you have.
• Look at how it’s affecting your credit score.
• Plan your next steps based on this information.

2. Set Up a Payment Plan

• Contact the IRS or state tax agency.
• Arrange a payment plan to start paying off your debt.
• Show lenders you’re handling your financial responsibilities.

3. Request Lien Subordination

• If you have a tax lien, ask the IRS to subordinate it.
• This allows lenders to take priority over the lien, making it easier to get a loan.
• Subordination shows lenders you’re working to resolve the lien.

4. Improve Your Finances

• Pay bills on time to boost your credit score.
• Avoid taking on new debts that you can’t handle.
• Save money to make a solid down payment on your future home.

Lastly, reach out to a tax expert or attorney at Hopkins CPA Firm

Clear Your Tax Hurdles and Open Doors to Your New Home With Hopkins CPA Firm

Well, owing the IRS doesn’t automatically prevent homeownership. So, in case you are questioning, “If you owe the IRS can you buy a house?” — then, yes, but only if you take the right steps at the right time.

Lenders care about risk, and tax debt raises concerns. But when you manage it wisely, you prove that you’re financially responsible. That’s what makes the difference.

This is where Hopkins CPA Firm can step in. With 130+ years of cumulative IRS resolution experience, we don’t just help you resolve tax debt; we help you position yourself for success. From clearing tax-related roadblocks to structuring your finances to improve mortgage eligibility to guiding you through IRS tax liens and home buying, we make sure you move forward with confidence.

Reach out to Hopkins CPA Firm today and take control of your path to homeownership.