Can You Purchase a Home If You Owe the IRS?

Owning a home is a significant milestone, but many potential buyers face financial hurdles, including IRS tax debt. If you owe money to the Internal Revenue Service (IRS), you may wonder whether you can still qualify for a mortgage and purchase a home. While IRS debt presents challenges, it does not automatically disqualify you from homeownership.

How to Purchase a Home If You Owe Money to the IRS

This article explores the impact of IRS debt on mortgage approval, ways to resolve tax liabilities, loan options, and strategies to improve your chances of buying a home while managing IRS debt. Smart Lending can help you educated on the rules for home buying with tax debt. The SL team will get you matched with trusted mortgage lenders that understand the IRS rules for home buying in 2025.

Understanding How IRS Debt Affects Mortgage Approval

When applying for a mortgage, lenders assess several financial factors, including credit score, debt-to-income (DTI) ratio, income stability, and tax liabilities. Owing money to the IRS does not immediately disqualify you from securing a loan, but it can impact the following:

1. Credit Score and Credit Report

The IRS does not report unpaid taxes directly to credit bureaus, but if the debt leads to a tax lien, it can significantly lower your credit score. A lower score makes it harder to qualify for favorable mortgage terms.

2. Debt-to-Income Ratio (DTI)

Mortgage lenders use DTI ratios to assess whether you can afford monthly payments. Large IRS debt may increase your DTI, reducing the amount lenders are willing to approve for your home purchase.

3. Tax Liens and Payment Agreements

Tax liens are public records that show lenders you have unpaid obligations, making mortgage approval more difficult.
If you have an active payment plan with the IRS and demonstrate consistent payments, some lenders may still approve your mortgage.

Can You Get a Mortgage If You Owe the IRS?

Yes, it is possible to get a mortgage while owing the IRS, but it depends on the type of loan and lender requirements.

1. Conventional Loans

Conventional lenders typically hesitate to approve borrowers with unresolved tax debt.
If you have an IRS payment agreement and meet DTI requirements, you may still qualify.
Large tax liens must often be paid off before approval.

2. FHA Loans

FHA loans allow borrowers with IRS debt to qualify if they have an approved payment plan with at least three months of on-time payments.
Lenders require an IRS payment agreement letter as proof of compliance.

3. VA Loans

VA home loans require a clear payment plan with the IRS.
Applicants must provide proof of on-time IRS payments for at least 12 months.
VA loans may offer more flexibility compared to conventional loans.

4. USDA Loans

USDA mortgages require borrowers to resolve serious tax delinquencies before approval.
A structured IRS repayment plan improves loan eligibility.

Steps to Buy a Home While Owing IRS Debt

If you have IRS debt but want to purchase a home, follow these steps to increase your approval chances:

Step 1: Set Up an IRS Payment Plan

If you owe back taxes, establish a formal payment agreement with the IRS. Many lenders will approve a mortgage if you:

Have a valid installment agreement.
Have made at least three on-time payments.
Provide proof of IRS agreement documentation.

Reference: IRS Payment Plans

Step 2: Obtain a Tax Lien Release or Withdrawal

If a tax lien is filed against you, resolve it before applying for a mortgage.

Pay off the tax debt to request a lien release.
Apply for a lien withdrawal if you qualify under the IRS Fresh Start Program.

Reference: IRS Fresh Start Program

Step 3: Improve Your Credit Score

A higher credit score helps balance the negative impact of IRS debt.

Pay down credit card balances.
Avoid new debts before applying for a mortgage.
Make consistent on-time payments on existing accounts.

Step 4: Reduce Debt-to-Income Ratio (DTI)

Lowering your DTI ratio improves your mortgage eligibility.

Pay off outstanding debts before applying.
Increase household income if possible.
Consolidate loans if it improves monthly obligations.

Step 5: Save for a Larger Down Payment

A higher down payment (10-20%) makes lenders more willing to approve loans for borrowers with tax debt.

Larger down payments reduce lender risk.
It may compensate for lower credit scores.

Step 6: Work with a Mortgage Lender Who Understands IRS Debt

Not all lenders have the same requirements for borrowers with tax debt. Work with lenders who specialize in helping applicants with IRS obligations.

Pros and Cons of Buying a Home with IRS Debt

Pros:

✅ Possible to qualify if an IRS payment plan is in place.
✅ Homeownership helps build equity and financial stability.
✅ Paying a mortgage is often cheaper than renting in the long term.

Cons:

❌ Tax debt increases financial burden and DTI ratio.
❌ Large IRS debt may lead to higher mortgage interest rates.
❌ A tax lien can prevent loan approval if unresolved.

Alternative Options If You Struggle to Get Approved

If you are unable to secure a mortgage due to IRS debt, consider these alternatives:

1. Delay Home Purchase Until Tax Debt Is Resolved

Waiting until your IRS balance is paid or a tax lien is removed can increase your mortgage approval chances and reduce loan costs.

2. Apply for a First-Time Homebuyer Program

Some states offer programs that assist buyers with tax issues if they meet income and repayment plan qualifications.

Reference: HUD First-Time Homebuyer Assistance

3. Seek Assistance from a Tax Professional

A tax professional can help negotiate a better IRS settlement plan and remove obstacles to mortgage approval.

Owing the IRS does not automatically prevent you from buying a home, but it does add complexity to the mortgage approval process. By setting up a payment plan, reducing other debts, and working with an experienced lender, you can increase your chances of qualifying for a mortgage.

If you have significant tax debt, consult with a financial advisor or mortgage specialist to explore the best path to homeownership.

References

Internal Revenue Service. (2025). Payment Plans and Installment Agreements.

RefiGuide. (2025). Purchase Money Mortgages.

Internal Revenue Service. (2025). Fresh Start Program for Taxpayers.