Until now, if a borrower owed any delinquent real estate taxes when they have sought to refinance their home with current tax delinquencies, they had no choice but to bring their tax debt current, if they were to close a mortgage loan.
On January 30 2018, the mortgage giant – the Federal National Mortgage Association – (aka, FNMA) delivered notices to its approved lenders that they were now permitted to approve potential borrowers despite the fact they owed back taxes.
In other words, with this new modification, a borrower is now NOT required to clear tax debt before they buy or refinance their home.
Of course, borrowers must meet program criteria to qualify. The guidelines to be met are:
- The lender needs to verify that the borrower has in place, an IRS-approved installment contract. The installment loan’s terms must be verified as well: the term, the total amount due and the monthly payment.
- Additionally, the borrower’s monthly installment payments must be verified to be ‘current’. Providing a monthly payment reminder is an easy way to demonstrate that the IRS installment loan is current, as it shows the amount and date of the last payment; as well as when your next payment is due.
- To be approved, however, a borrower cannot have an open IRS lien on the home being financed. An IRS lien occurs when the borrower defaults on an existing IRS installment contract. This will result in a loan denial.
The IRS Installment Debt will be included in your Debt-to-Income (DTI) Ratio
While the lender can now approve and close a mortgage loan – even if the borrower has an outstanding tax debt, lenders wouldn’t be foolish if they were to ignore this regularly occurring monthly debt. Instead, this verified installment payment would now be included in the loan application’s underwriting analysis; just like a car loan or a student loan.
Ultimately, this would cause a borrower’s DTI to increase, which then may reduce the amount a borrower will qualify for. There is no magic here; FNMA and the IRS are displacing the debt from a ‘lump sum debt ’ due immediately, to a long-term debt solution that is, at the very least, included in the borrower’s qualification analysis.
A borrower can always try to renegotiate with the IRS to lengthen their loan term (thus reducing the monthly payment) to help them qualify for a larger mortgage. Remember, though you are negotiating with the IRS, so keep you expectations reasonable.