We’re officially in the midst of tax season (if you haven’t done yours already, consider this your reminder!), which magnifies the amount of borrowers we encounter who owe back taxes to the IRS.
Owed taxes that aren’t paid can result in tax liens, which take superior position to mortgage liens – an item of great concern for lenders.
While Tax Liens will always need to be repaid before a borrower is eligible for a Conventional loan, per a recent change to the Fannie Mae Selling Guide borrowers who have entered into e repayment plan are eligible under the following conditions:
When a borrower has entered into an installment agreement with the IRS to repay delinquent federal income taxes, the lender may include the monthly payment amount as part of the borrower’s monthly debt obligations (in lieu of requiring payment in full) if:
- There is no indication that a Notice of Federal Tax Lien has been filed against the borrower in the county in which the subject property is located.
- The lender obtains the following documentation:
- an approved IRS installment agreement with the terms of repayment, including the monthly payment amount and total amount due; and
- evidence the borrower is current on the payments associated with the tax installment plan. Acceptable evidence includes the most recent payment reminder from the IRS, reflecting the last payment amount and date and the next payment amount owed and due date. At least one payment must have been made prior to closing.
Note: The payments on a federal income tax installment agreement can be excluded from the borrower’s DTI ratio if the agreement meets the Fannie Mae terms for Debts Paid by Others, or Installment Debt.