So you want to buy a home but you owe the IRS money. Unfortunately, if the IRS has got installment agreements with you or tax liens on you, you’ve got a big, big problem.
To make things worse, you know that interest rates are going up. But there’s a silver lining. As monthly payments on new home purchases go up, the price of buying a home is likely to come down. Since the Fed is talking about raising rates yet again, costs should come down even more.
A buying opportunity? Maybe. But you can’t, you figure, because you owe the IRS. The good news: you are not alone. Having the IRS on your back is more common than you think.
The even better news? I used to work at the IRS, but no sirree, not anymore. Now I’ve crossed over to the side of all that is good and light, ready to help people just like you fight Darth Vader.
Right here, right now, I’m going to teach you three ways to buy a home, even if you owe the big bad IRS big-time money.
First things first: Do I have to tell the bank I owe the IRS?
Yes. Because they’re going to find out anyway. Your loan officer determines what you can afford by looking at four things:
- Your credit,
- Your income
- Your total debt; and
- Your monthly mortgage payment (which replaces your rent or existing mortgage)
When they check your debt, they check directly with the IRS and they make you sign a form to authorize that disclosure. That’s why you must tell your loan officer how much you owe the IRS. There’s no way around it. Remember, they don’t get paid unless you get a loan, so it’s in their best interest to help you.
OK, but why does my bank care if I owe the IRS?
The IRS is the Godfather of creditors. They come first, before anyone else. If the IRS takes your money, and there’s none left for the bank, the bank doesn’t like that. The bank may be ahead of other creditors you have, but they’re always behind the IRS. That’s why you must be strategic when you owe the IRS and want a home loan.
Just remember, the government may love you, but they love your money even more. They are your silent partner in what you make, and if you “forget” to pay them, they are like an elephant: they always remember.
There are three situations you may have to deal with in order to get your mortgage approved. I’m going to show you what you need to do for each.
#1 You are already on or ready to get on an Installment Agreement
Installment Agreements are what the IRS calls payment plans. There are three types of installment agreements – automatic, streamlined, and in-depth.
Automatic plans are if you owe them less than $10,000 and want to pay it off in under 3 years.
Streamlined plans are if you owe them less than $50,000 and want to pay them off in under 6 years.
In-depth plans are for anyone who owes more than $50,000 (yes, whether you owe $51,000 or $51 million, you both get the same treatment: doesn’t that make you happy?), and to enter into an in-depth plan, you’ll need to talk to an IRS officer and send them a bunch of documents. If this doesn’t sound like a lot of fun, you can also hire a tax attorney or an Enrolled Agent to do your talking for you. You can also hire a regular CPA or attorney, but if they don’t have a lot of IRS experience, don’t.
For Automatic and Streamlined plans, you can apply for the installment and get approved online. Most people can do this themselves.
Now here’s the amazing, awesome news: Once your installment agreement is officially in place, and you have made at least three payments on your plan, the bank will allow you to get loan, even if you owe the IRS money. If your loan officer is savvy, they should already know this. If they don’t, you need a new loan officer. You want one that’s worked with people in this type of situation before.
#2 You get a loan that includes both the mortgage AND the IRS debt
Yes, you can actually do this. One mega loan covers it all. The way it works is that, when you get the home loan, the bank will pay off the IRS debt at the same time.
Here’s an example: Mandy wants to buy a home for $300,000. She will put down 10% ($30,000) and take out a loan for the rest ($270,000.) But Mandy also owes the IRS $15,000. As part of escrow (which is the middleman between the bank and you that handles all the money) the escrow agent will pay off your $15K IRS debt and you will have a loan of $285,000 instead of just $270,000. In other words, the bank will have lent you the money to cover your mortgage and to make you debt-free with the IRS.
#3 You ask the IRS to go into 2nd position
This third method applies when you already have a Federal Tax Lien and want to refinance your property.
Say what? Why would the IRS ever go into second position behind a bank? Because, believe it or not, they are human. Sometimes. Like any other creditor, if the IRS has a carrot dangled in front of them, they just might bite.
To ask the IRS to take a second position behind a bank, you fill out a special IRS form (Form 14134), which is a request for a Certificate of Subordination of Federal Tax Lien. But what’s the carrot?
When you have a Federal Tax Lien on your property, you prevent the IRS from seizing the property by having an installment agreement in place. The way to get approved for a Certificate of Subordination is to give them more money faster than you would have otherwise. For example, you offer them two things: (1) a one-time up-front lump sum payment and (2) an increase in your monthly installment payment to them.
Here’s an example.
Steve owes the IRS $400K and is on an installment agreement with payments of $10,000 a month. Steve had a $1M home that had a short-term loan coming due, and he had to refinance into a new short-term loan. But due to the Federal Tax Lien, banks wouldn’t touch the refi. Steve then applies for a Certificate of Subordination from the IRS. He offers them a lump sum one-time payment of $30,000 and also agrees to increase his monthly payment plan from $10,000 to $11,000 a month. The IRS gets $30K extra today, plus an extra $12K/year ($1K/month x 12 months). The IRS loves Steve’s money, so they agree, and Steve can refi.
Note that Steve had to get the Certificate of Subordination first. Only after getting the Certificate could he get the new loan, which means he owes the $30,000 and will continue to have to pay $11,000 a month, no matter what. So even if Steve fails to refi and is forced to sell the property, he’s got to pay up to the IRS. Moral: Don’t apply for the Certificate unless your loan officer can pretty much guarantee the refi.
Housing is cooling, and you may find an opportunity to buy a home now at a better price. Don’t let owing the IRS money stop you. Instead, use these 100% legal, IRS-approved techniques to get the IRS out of the way and to buy the home you want.