Can Owing Back Taxes Affect a Refinance?

Owing back taxes makes it more difficult to qualify for a refinance loan.

Owing back taxes makes it more difficult to qualify for a refinance loan.

Not paying the taxman whether at the local or federal level can cause you problems if you try to refinance the mortgage on your house. Like other bad debts, delinquent taxes can affect your credit and your ability to qualify for a refinance loan. Anything that dings your credit score may decrease your chances for refinancing approval. At the very least, you can expect that the lender is going to charge you a higher interest rate.

Property Taxes

If you fall behind on your property taxes, your lender may pay the taxes to protect the interest it has in your home. However, the amount of the tax will be added to your mortgage debt, which won't look good when you apply for a refinance loan. In all likelihood, you will have to pay off any back taxes you owe as a condition for getting approved for refinancing. Let the bank or mortgage company know up front that you owe back taxes on the property. Your lender may be more willing to work with you if you are honest about your situation from the start. While not all taxing authorities provide information to the credit-reporting bureaus, mortgage lenders usually report back to the credit bureaus monthly.

Federal Tax Lien

If you owe back income taxes to the Internal Revenue Service, the federal government has the right to place a tax lien on your property. A federal tax lien gives the government priority over other creditors for payment if you sell the property or enter bankruptcy proceedings. Placement of the lien can have a negative effect on your credit report and keep you from qualifying for a refinance loan. Credit reports list public records such as tax liens. Another possible consequence is that the loan proceeds from refinancing the property could actually go to the federal government instead of to you.

Lien Subordination

In cases where the property you are using as collateral to secure a refinance loan has a federal tax lien against it, the government is sometimes willing to help. You can request a lien subordination requesting that the government’s lien take second place to the lien the lender would place on the property to secure the loan. Complete Form 14134 -- Application for Certificate of Subordination of Federal Tax Lien -- to request a lien subordination. The IRS may require that you use some of the money from the loan to pay all or at least part of the back taxes you owe.

Other Options

If you owe back income taxes but can't afford to pay them, you might be able to work out an agreement with the IRS allowing you to pay the outstanding tax debt you owe in installments. Usually, the IRS is willing to give you more time to pay your taxes, but the extra time will cost you. The government will add late penalties and interest to your tax bill. Although this may be one of the few options available to you, the time to contact the IRS is before the federal government places a tax lien on your property. Many municipal taxing authorities also allow taxpayers to arrange a payment plan to catch up on delinquent property taxes. A repayment plan might help qualify you for a home refinance loan by showing that you are bringing your debts current and making your payments on time.

About the Author

Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.

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