Paying off your debts is a great idea. Although it is possible to buy a house if you owe taxes, your tax debt can make it more difficult to qualify for a mortgage if it becomes a tax lien.
If you owe taxes to the federal government and don’t pay them by the due date on your federal tax return, those taxes can turn into tax debt. If you have tax debt, you will receive urgent notices requesting payment.
The most common reasons for tax debt include:
But good news—you can still be approved for a mortgage if you have tax debt, but if you fail to pay it, it turns into a tax lien, which can interfere with your loan application.
That’s because mortgage lenders hesitate to approve your home loan if you have a tax lien. They want to be confident you’ll repay your loan, so most lenders will pass over an applicant that owes tax money.
If you have tax debt and want to qualify for a mortgage, the easiest way is to pay off your tax debt before applying.
If you’re unable to pay your debt before applying for a mortgage, you can try and get an FHA (Federal Housing Administration) loan or a VA (Veterans Association) loan, which are loans designed specifically for low-income individuals or those with bad credit.