If you’re considering negotiating a payment plan with the Internal Revenue Service or thinking about other options for tax debt relief, you may have some concerns. Can a payment plan with the IRS keep you from buying a home?
First, let’s explore how an installment agreement or payment plan can help you avoid additional interest and penalties. Then we’ll find out what a payment plan means for your financial future, including your prospects of buying a home or refinancing.
What Is an IRS Installment Agreement?
An IRS installment agreement is a long-term payment plan that gives you an option to pay off your taxes in monthly payments for up to six years. Your balance must be less than $50,000, including principal, penalties, and interest.
If you owe the maximum amount, you’d have to pay just under $700 per month to meet the terms of the agreement.
A short-term payment plan gives you 180 days from the tax deadline to pay your balance in full, as long as you don’t owe more than $100,000 in tax, interest, and penalties.
For many people facing seemingly unmanageable tax debt, an installment agreement offers a clear route to face your financial problems head-on.
How Much Interest Does the IRS Charge for Payment Plans?
An installment agreement comes with a lower interest rate than the IRS normally charges for unpaid tax debt. During the months your installment agreement is in effect, interest will accrue at a rate of 0.25%, rather than the usual 0.5%.
IRS Payment Plan – Missed Payment Consequences
If you miss a payment after you have an installment agreement in effect, the IRS will send you a Notice of Intent to Terminate Your Installment Agreement. You must reply within 60 days, filing an appeal to maintain the agreement. The IRS can’t take action during those two months. But, after that time, the agency will resume collections action if you haven’t filed an appeal and gotten back on track with on-time payments.
To avoid missing a payment, the IRS recommends that you set up ACH direct debit, so funds are withdrawn from your bank account monthly.
However, there is some good news.
Owing back taxes, having an installment agreement, or even missing a payment on your agreement with the IRS won’t affect your credit score. The IRS doesn’t report payments to the three major U.S. credit bureaus, Experian, TransUnion, and Equifax.
If you’re applying for a mortgage or other loan, you’ll want to take your payment agreement into consideration when you decide how much money you can borrow. Mortgage lenders will consider your tax debt as part of your debt-to-income ratio, so it may affect your ability to secure a mortgage.
Can You Buy a Home If You Have an IRS Payment Plan?
An IRS payment plan may not keep you from buying a home, as long as the rest of your finances are in good order. You’ll need to be able to show the bank or mortgage lender that you can afford the mortgage, even while you continue making installment agreement payments.
The Federal Housing Administration, along with Freddie Mac and Fannie Mae, the two largest purchasers of mortgages in the U.S., have standards regarding borrowers with IRS payment plans. These standards are designed to keep homeownership within reach of taxpayers who are working to pay off their IRS tax debt, while also ensuring the borrowers are a good risk and can afford the mortgage.
Mortgage lending standards protect lenders and borrowers. You don’t want to wind up in a house that you can’t afford and face foreclosure. When you’re preparing to buy a home, make sure to create a budget that factors in the added costs of home maintenance, repairs, and utility bills. Lending requirements are in place to help ensure your new home won’t be a financial mistake or create additional hardship.
FHA Guidelines for IRS Payment Plan: FHA IRS Payment Plan Requirements
The FHA allows first-time homebuyers and other lower- to middle-income Americans an opportunity to buy a home with as little as 3.5% down. Unlike conventional mortgages, you may be able to qualify for an FHA loan even if you have a low credit score or bankruptcy on your credit report.
If you have an IRS payment plan in effect and have made at least three months of on-time payments, the FHA will consider you as a loan candidate, according to the FHA Loan Handbook.
Even if the IRS has a tax lien against you, as long as you’re making your installment agreement payments on time, you may qualify for an FHA loan. However, if you have state or federal tax debt you haven’t paid or made arrangements to pay, you won’t qualify for an FHA mortgage.
However, the FHA will take your monthly tax payments into consideration when calculating your debt-to-income ratio. If your tax payments pushes your debt-to-income ratio higher than 43%, you may not qualify for the loan.
If you’re looking to buy a home, try to pay off other debt, such as high-interest credit card debt, before applying for a mortgage. This can lower your debt-to-income ratio and improve your chances of qualifying for an FHA mortgage. Paying down credit card debt has the added benefit of increasing your credit score, which can lead to more favorable loan terms for your mortgage, such as a lower interest rate.
Fannie Mae and Freddie Mac – IRS Payment Plan Guidelines
Fannie Mae and Freddie Mac are government-sponsored enterprises established to purchase loans from mortgage companies and bring stability and liquidity to the residential mortgage market. Because these entities buy mortgages from private lenders, most lenders follow lending standards set by the organizations.
As with the FHA, Freddie Mac and Fannie Mae will consider a mortgage application if you are making payments on an installment agreement and the total amount of taxes owed or the monthly payments are disclosed in the mortgage file. Installment agreement monthly payment amounts are included in the borrower’s debt-to-income ratio.
Borrowers must be up to date on their installment agreement, with at least one payment made before closing on the mortgage.
Unlike the FHA, Freddie Mac and Fannie Mae will not accept a mortgage application if the IRS has filed a Notice of Federal Tax Lien against the borrower.
Bottom Line: Based on guidelines from major lenders and the FHA, if you have tax bills that you are unable to pay and continue ignoring, you won’t qualify for a mortgage.
You’re also putting yourself at risk of increased fees, penalties, and collections action from the IRS. The experts at Alleviate Tax are here to help you face even the most difficult tax situations.
How To Set Up Payment Plan for Federal Taxes
Setting up a payment plan can be scary and frustrating. Just trying to contact the IRS can be time-consuming for someone without the right knowledge and connections. It’s important to seek expert help for this process.
Plus, by working with professionals, we can help you apply for penalty abatement to reduce the amount you owe.
It’s important to note that a long-term direct debit installment agreement has setup fees of $31 if you apply online, or $107 if you apply by phone, mail, or in-person. This fee might be waived for low income taxpayers.
Dealing with the IRS when you are already experiencing the stress of tax debt can be overwhelming. Let Alleviate Tax help.
FAQ:
Does IRS payment plan affect mortgage?
Many lenders will still approve your mortgage application if you’ve made on-time payments and maintained your installment agreement.
Should you consider loans to pay off IRS taxes?
If you already own a home, you might consider taking out a home equity line of credit to pay off your tax debt. If you have a good credit score, you might qualify for a personal loan. If you can’t borrow money to mark your tax debt as paid in full, consider an installment agreement. You’ll still have to pay interest to the IRS. But you can make predictable monthly payments via direct debit to take control of your finances and pay off your debt.
Can you have two payment plans?
If you have a payment plan with the IRS and accrue more tax debt the following year, the additional amount of tax debt will be added to your installment agreement, which might increase your monthly payments. You can’t have multiple payment plans at the same time.
