April 06, 2023

Can I Get a Mortgage with Unfiled Taxes? Here is What You Need to Know

Personal Taxes

Buying a home is one of the most significant investments most people make in their lives, but obtaining funds for it can be difficult if you owe federal or state taxes.

So you must be pondering whether you can get a mortgage with unfiled taxes? This is one of the most common questions taxpayers ask CPAs. The answer is yes, but you’re unlikely to negotiate favorable home loan terms, and you’ll end up paying steep interest rates.

Unfiled taxes can be a major roadblock on your path to a new home because most lenders won’t approve your mortgage application unless they’re sure you can repay the loan.

We’ll tell you everything you need to know about getting a mortgage with unfiled taxes and show you how to increase your chances of securing a home loan.

Reasons Lenders Want to See Your Tax Returns

To understand why getting a mortgage with outstanding tax debt is so complex, you must first understand why lenders request tax returns when approving mortgage applications.

In most cases, failing to file taxes will create a tax debt, which affects your financial situation. Most lenders review all your financial documents, including credit card reports, proof of income, and tax returns.

Your application will raise a red flag if you haven’t filed taxes for the last two years and you can’t show the lender tax returns for those years.

Lenders often utilize the IRS’ Income Verification Express Service (IVES) to access a taxpayer’s tax return transcript, Form W-2, or Form 1099 transcript. Consequently, they can easily determine if you have unfiled taxes or outstanding tax liabilities.

Despite this, getting a home loan if you owe overdue taxes isn’t impossible.

Applying for a Mortgage with Unfiled Taxes

The vast majority of lenders will reject your mortgage application if you owe state or federal taxes, but a small percentage of lenders might agree to give you a home loan even if you have unfiled taxes.

Owner-Carry Mortgages

Applying for an owner-carry mortgage is one avenue you can explore if you don’t have tax returns for the last two years. This type of mortgage enables you to pay the owner of the property you want to buy in installments.

The downside is that owner-carry mortgages usually involve a lofty balloon payment for the property’s remaining value at the end of the mortgage term, which usually expires after three to five years.

Finding the funds for a balloon payment can be difficult, especially if you don’t resolve your tax situation in the meantime. Hence, you shouldn’t enter into an owner-carry mortgage before consulting a real estate agent and planning how to repay the loan.

No Tax Return Mortgage Lenders

Taxpayers with unfiled tax returns are ineligible for Federal Housing Administration (FHA) and Department of Veteran Affairs (VA) loans that have zero to 3% down payment requirements.

However, some institutional lenders collaborate with high-risk clients and disregard tax return information. They commonly review bank statements and proof of income when approving home loans.

No tax return mortgage lenders often require high down payments, and you must be able to pay 10% or 20% of the property’s value to qualify. Moreover, these lenders charge higher interest rates than lenders that review tax return information.

Meeting the Requirements for Mortgages Without Tax Returns

Taxpayers with self-employed status can apply for mortgages without showing their tax returns. W2 wage earners can also qualify for home loans based solely on their annual income and credit score, and they don’t necessarily have to present their tax returns to lenders.

Here are some of the most important requirements you must meet to apply for a mortgage without a tax return.

  • Employment status – You must submit proof that you’re self-employed. The lender will verify your documents by checking your business license or using other methods.
  • Credit score record – Lenders who don’t require tax returns often use the credit score to determine the borrower’s down payment and interest rate.
  • Bank statements – Presenting bank statements for the last 12 to 24 months is a standard requirement a borrower must meet to apply for a mortgage without a tax return. Underwriters use bank statements to verify the applicant’s income.
  • Borrower’s list of assets – All mortgage applications that don’t include tax returns must contain the list of assets an applicant owes. Each asset can serve as a compensating factor that improves your chances of getting a home loan.

Back Filing Taxes and Applying for a Mortgage

Getting your affairs in order and negotiating an installment agreement with the IRS will improve your chances of securing a home loan. After all, back filing taxes will help you avoid further penalties and interests.

Having unfiled returns doesn’t always mean you’re in debt, so if you were eligible for a tax refund in the last three tax years, filing a tax return will secure extra funds you can use to buy a home.

This scenario is rare, and most taxpayers who don’t file returns for two or more years have considerable tax debt. Choosing one of the IRS’ payment plans and making regular payments can make you eligible for a mortgage.

Still, you must prove that you’ve reached an installment agreement with the IRS to the lender. Attempting to apply for a mortgage after making a handful of payments isn’t advisable because most underwriters want to see that you can make regular payments over an extended period.

A loan officer will consider your payments to the IRS when determining your debt-to-income ratio and deciding whether to approve your application.

Mortgages and Tax Lien

Getting a mortgage becomes more complicated if the IRS places a tax lien on your property. The IRS has the right to file a Substitute for a Return for you and use the tax lien to collect your outstanding debt.

Removing the federal tax lien that gives the IRS legal claim on your property is the first step you must take if you want to apply for a mortgage. Remember that having an installment agreement with the IRS isn’t always enough to lift the tax lien from your property.

You’ll have to get a certificate of subordination from the IRS that gives the mortgage lender priority over the property if it goes into foreclosure.

Developing a Plan to Buy a Home with Outstanding Tax Debt

Getting a mortgage with unfiled taxes is a process that doesn’t always have a favorable outcome.

The course of this process and the things you’ll need to do will depend on the amount you owe for state or federal taxes, your ability to pay the debt, and the type of mortgage you’d like to apply for.

However, you’ll have to reach certain milestones on your path to your new home.

  • Back filing taxes – The first thing you’ll need to do is back file tax returns for all tax years you missed. You can then start working with a tax professional on entering an installment agreement with the IRS. Obtain a copy of the document you can show to an underwriter that lists the details of monthly payments.
  • Make regular payments for at least three months – Applying for a mortgage too early will reduce your chances of getting a home loan. Most lenders want to see that you’re making regular payments for three to twelve months before approving your application.
  • Keep the lender informed about the payment plan terms – The lack of transparency regarding the terms of the agreement you reached with the IRS can be why a lender rejects your application. Be prepared to provide all documents a loan officer wishes to see.

There’s no guarantee that the lender will approve your mortgage application even if you follow the steps above, but doing so will give you a better chance of obtaining a home loan. Moreover, you shouldn’t apply for a mortgage before acquiring a certificate of subordination from the IRS.

Frequently Asked Questions

What Are My Chances of Getting a Mortgage if I Have Unfiled Returns?

Although some lenders approve mortgages without reviewing the applicant’s tax returns for the last few years, your chances of getting a home loan if you have unsettled tax debt are slim.

How Many Tax Returns Do I Have to Submit to Apply For a Mortgage?

Lenders usually require applicants to include returns for the last two years in their mortgage applications, but sometimes you may be asked to provide tax returns for the previous three tax years.

Can I Refuse to Show My Tax Returns to a Lender?

Most lenders verify the taxpayer’s information with the IRS’ Income Verification Express Service, so refusing to show your tax returns isn’t an option.

Can I Apply for a Fanny Mae Loan if I Owe Back Taxes?

Taxpayers with outstanding tax debt are ineligible to apply for Fanny Mae loans. Still, some lenders may use the Freddie Mac underwriting system to process your mortgage application if you owe back taxes.

Reach Out to a CPA

The average mortgage size in the United States in 2023 oscillates between $438.000 and $430.000. Most lenders won’t approve a home loan application for such a substantial amount before thoroughly checking the applicant’s financial records.

Getting a mortgage if you have unfiled tax returns isn’t impossible, but tax debt can hurt your chances of obtaining the funds you need to buy a new home. Hence, settling the debt you owe to the IRS is one of the first steps you must take if you want to apply for a mortgage.

Visit choicetaxrelief.com or call 866-8000-TAX to speak with a CPA who can help you get a mortgage even though you have unfiled tax returns.

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Logan Allec, CPA

Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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