Q: Hi Carolyn, We have our eye on a house and it’s perfect for us. We owed the IRS money and have been paying on it for the past four years and have only one year to go. We have never missed a payment. Our other credit is perfect, and our household income is $105,000. We pay off our credit cards in full each month and have a car payment of $250/mo. Can we buy this home?
A: I’ve been asked this question quite a lot lately. For some people, they have a tax lien, either from the IRS or a state tax lien. For others, they have a judgment from an old, unpaid bill. Either way, the verdict is the same.
When you have a lien or judgment, it blocks a mortgage from recording in first position. This means that the mortgage lender would be second in line to get paid, behind the IRS or other creditor, should you default on the loan. This is unacceptable and will never happen. So NO, you cannot close a mortgage until the lien or judgment has been paid in full.
The fact that you’ve been making payments on time does not help. If there is even $1 owing, the lien or judgment is in place, blocking the mortgage. That is the legality of the situation. (And that is one of the reasons why an unpaid creditor will go through the process to place a lien or judgment against someone.)
“What if the lien or judgment doesn’t show up on my credit report?” some people have asked.
You still cannot get around it, even if it doesn’t show up on your credit report. The lender will discover it and your loan will not close. Even if you were approved already, once the title report comes in and the lien shows as tied to your social security number, your loan will promptly flip into a big, fat denial. And believe me, it’s not fun having the rug ripped out from under your dream house at the end of the process.
There are two ways you can buy a house with an existing tax lien or judgment:
1) Find a private party seller who will act like the bank and carry the loan for you. Some people don’t need all their cash up front and are happy to carry a contract for 8% – 10% (the typical rate for such a loan). Usually, the term is set for five years with a balloon payment for the balance due. At that time, you would get financing with a bank to pay off the seller.
2) Pay all cash for the property.
If you know anyone who is in this position, please refer them to this information. A lot of people think they can hide their tax lien or judgment and get a home loan closed — but that is a BIG mistake! There is no reason to have a real estate agent running all over town finding you the perfect home when it is a legal impossibility to close your mortgage. And there is no reason to get your own hopes up before your lien or judgment has been paid in full.