Federal tax liens are a serious business. But they don’t necessarily have to derail your VA home purchasing plans.
The Internal Revenue Service can put a federal tax lien on your residential or business property, your assets and other important considerations if you’ve neglected or simply failed to pay a tax debt. The lien, which helps safeguard the government’s financial interest, can attach to your property, your vehicles and any other assets, including those you’ve yet to accrue.
These can also be a real obstacle to securing a VA home loan. Along with attaching to your assets, a tax lien can hamper your overall ability to get credit. These can even stick with you after a bankruptcy. The IRS can ultimately take your property to resolve the tax debt if you don’t repay it or at least make plans to, and that’s a scary proposition for mortgage lenders.
So does having a tax lien mean there’s no way you can obtain a VA loan?
Not exactly. Let’s take a look at the fine print.
Tax Liens are Tough
Individual lenders may view tax liens differently. From our perspective, it’s certainly possible to have tax liens and still move forward with the VA loan process. Ideally, you’re able to pay off the lien in full before things really get moving. If that’s not possible, then we would need the following:
- You would need to have a repayment plan set up and have made all on-time payments for at least the last 12 months
- The repayment amount would need to be included in your overall debt-to-income ratio (DTI ratio), which could impact how much could borrow or your overall ability to qualify
- On Page 4 of the Uniform Residential Loan Application, you would need to indicate that there’s an outstanding tax lien
Given all that, there’s still no guarantee. Having a federal tax lien is likely going to trigger what’s known as a “manual underwrite,” which is a more involved process that can’t be ushered through a lender’s Automated Underwriting System (AUS). The bottom line is these files require a close look and often come with tighter credit, income and debt requirements.
For example, the lender’s maximum allowable DTI ratio will likely be lower on a manual underwrite than on a loan file going through the automated system.
So, yes, it’s possible to get a VA home loan while having tax liens. But these can certainly make the road a lot tougher and hamper your overall loan amount. If you don’t have a track record of on-time payments over the last year, you may want to hold off on applying. Considering paying off the lien in full if it’s financially feasible, as that will likely clear up the issue in short speed. The IRS releases taxpayers from the lien within 30 days of payment.
If you have questions or want to pursue a VA loan given your federal tax lien situation, talk with a Veterans United loan specialist at 855-524-7279.
Photo courtesy of Elvert Barnes