Buying a House When You Have a Tax Lien or Judgment

house colorful 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.

14 responses

  1. Lester Baldridge | Reply

    interesting. back in 2001 i bought a house with an FHA loan while having a tax lien for almost 20 grand against me. Also, if you have a payment agreement with the IRS and have been making on time payments for 3 months or more the IRS will remove the lien, and yes, you can finance. these are facts that are easily researched.

    1. Thank you for sharing that information, Lester.

    2. who did you get to finance your FHA loan. I’m in the same boat with 2 IL state tax liens and it’s only like $4000.00

  2. This is not entirely correct. It is true for Freddie/Fannie loans but if you can demonstrate timely payments for a period of time, there are other loans you can apply for (FHA/VA/USDA). Many lenders know exactly how to handle this situation. Some IRS liens don’t require fist lien position and will subordinate to the mortgage. And some IRS liens will be withdrawn if the balance is low enough.

  3. I owe the Irs 25K. I have been making ontime monthly payments for over a year. I was recently preapproved for a mortgage. The irs payment does not show up on my credit report. My question is will the mortgage broker know i owe that money and will i get denied if they find out?

    1. It is likely that your mortgage lender will discover the tax bill. However, since you have paid on time for 12 months, it should not cause a loan denial. The lender will input your monthly payment into the debt ratio, and as long as your ratios are fine, you should not have a problem closing the loan.

  4. So if I have been doing a rent to own and I now have a judgement against me after 5 years a bank will finance me so I can pay off the seller?

    1. Julie, I have not seen your credit report, nor do I know the type of judgment you have, the amount, the age, the payment history, or anything else; therefore, it is not possible for me to advise you. I suggest you ask your loan officer who has your credit report.
      Thank you for reading my blog.
      Carolyn

  5. “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.” That pretty much sums it up. It’s a real shame that someone necessarily know about their liens until right at the last minute, isn’t it? I mean there’s so many different types of liens people may not even be aware of.
    A creditor doesn’t even necessarily need to inform you, which is a huge headache. There ought to be an app or a service that clears title for people freely and easily.

    1. Thank you for commenting on this topic, Brian. It looks like your company, Big State Home Buyers, helps home owners negotiate liens. For those who would like more information, see here.

  6. Ho Caroline, my wife and I bought a house with cash 2 years ago and now in the process of buying another one buy through a bank, and we’re also in the process of selling the current house. I found the deed to the current house and it has a couple of judgements on it due to my stupidity of being young! What can I do to clear this up and proceed with the new house?

    1. First, I would check with the title company to see what is currently showing as liens. Then, contact the creditors and negotiate a settlement, per Chapter 15 in Repair Your Credit Like the Pros. Follow the directions exactly so you get the best results, both financially and on your credit report. Lots of people made mistakes before they knew better, so be encouraged and proceed with confidence!

  7. I’m currently on a payment plan with the IRS for $155,000 total debt from #1 not filing taxes due negative rental income and #2 foreclosures/short sales. This happened between 2006 to 2013 . I’m current on my payments and I don’t plan on ever being late. The IRS has already put 2 liens on my primary residence I bought 18 months ago.

    I consulted with my Credit Union about buying another home as my primary and rent my current one. They told me I’d be approved and be able to close without a problem.

    Will the IRS and/or can the IRS force sale on either property in order to collect? As long as I’m current on my installment plan payments, can I buy another home as my primary residence or investment? Is there a legal way to buy another property that would prevent the IRS from touching it?

    Thank you,

    Cliff

    1. Thank you for your question, Cliff.

      As long as you stay current on your payment plan with the IRS, you can buy another property. I am assuming your payment plan is in writing, so you have a legal agreement.

      I do not know of a legal loophole to prevent the IRS from placing a lien, if taxes are in default. Taxes are one of those things that never go away until they are paid as agreed (per whatever agreement that has been put in writing).

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