Owing back taxes isn't an automatic deal-breaker when you apply for a Federal Housing Administration mortgage. As long as you're paying off your debt, the fact you paid late doesn't disqualify you. It may, however, affect your finances and your credit score enough that you can't land as big a mortgage as you'd like.
Debt to Income
Qualifying for an FHA loan hinges on the ratio of your debt payments to your income. Your monthly housing payment -- mortgage, taxes, insurance -- plus your debt payments can be, at most, 41 percent of your monthly pre-tax income. If you owe a lot, including back taxes, you may only qualify for a small mortgage. If you're going to pay off the tax bill in the next 10 months, you don't have to include it when figuring the ratio.
Even with an FHA-backed loan, you need a credit score your lender can live with. The good news is being late on your taxes or entering a payment agreement isn't a black mark like bankruptcy -- to the credit bureaus, an IRS payment plan is just one more credit account. If things reach the point where the IRS puts a lien on your house, you're not going to get an FHA loan until you and the IRS strike a deal on your debts.
Once you pay off an IRS lien or work out a payment agreement, and everything else checks out, the FHA considers you an acceptable credit risk. One of the other conditions you have to meet is that your credit history shows you consistently pay your bills on time. If you work out a tax-payment agreement, then miss payments -- or default completely -- you may not meet that FHA standard.
If back tax bills or other debt payments give you a debt-to-income ratio that denies you the house you want, there are ways around that. The FHA will still insure your mortgage if you make a larger down payment the reduce the loan. If you show you have substantial cash reserves, or your net worth is large enough to pay off the mortgage, that also allows you a higher debt-to-income limit.
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