Owing money to the Internal Revenue Service can cause you a great deal of stress if you ignore the tax agency's calls and fail to handle the debt properly. IRS collection practices can ruin your credit score and lock you out of bank accounts. Handling your obligation responsibly can keep these collection practices at bay and allow you the freedom to secure other forms of credit, including a home mortgage.
Using a Payment Plan
Owing the IRS back taxes may not hurt your credit score if you are proactive about your debt and make payment arrangements with the federal tax agency. Setting up a payment plan to eliminate your back balance before taxes are due next year will keep the IRS from reporting your delinquency to a credit reporting bureau. It's important to make timely payments in accordance with your agreement with the IRS. Missing a payment could mean additional collection actions that could hurt your credit score and make obtaining other forms of credit, including a home mortgage, difficult.
Disclosing Financial Obligations
When you apply for a mortgage, the bank handling your application will want to examine where your money goes each month. You must disclose all of your current debts in good faith to the bank or other lending institution so the mortgage broker in charge of your loan application can make a fair decision. Hiding your financial obligations, including owing back taxes to the IRS, could cause the broker to reject your application. Your tax debt could also cause a broker to reject your loan application depending on the size of your debt and your ability to repay what you owe.
Tax Lien Possibility
The last thing a bank wants to do is create a mortgage just so the IRS can attach a tax lien to the property. A lien placed by the IRS is extremely durable and survives a multitude of legal actions, including bankruptcy and foreclosure. Disclosing your IRS tax payment plan to your prospective lender is a smart way to show the loan officer in charge of your application that you both have the ability to pay off your debt and that the debt is not in danger of becoming delinquent.
Credit Score Factors
Your credit score is ultimately the largest determining factor in your ability to secure a home mortgage. It's important you have the highest credit score possible when applying for your mortgage to maximize your chances of securing the best interest rate and repayment terms. If it's possible to pay off the IRS before applying for your mortgage -- do it. If you can't pay off the tax debt completely, reduce the debt as much as possible while still keeping your other debts current before submitting your application.