Do you have a tax lien against you because of unpaid taxes? You might think that you can’t get financing with the tax lien in place, but there are ways around it, even with the VA loan program. Typically, lenders avoid borrowers that have liens on their property, but if you have the right circumstances in place, you may be able to get the VA loan that you are eligible to receive.
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What is a Tax Lien?
First, let’s define a tax lien.
Typically, when you don’t pay your income taxes, the IRS gives you a certain amount of time to get up-to-date on your payments. If you don’t get in touch with them or make arrangements to get the amount due paid, they can file a tax lien against you. The tax lien becomes a part of your credit history and can affect any personal property that you own.
How to Get Around the Tax Lien
While you can’t get away without paying the tax lien, there is a way that you can ‘make good’ on it and still get your VA financing. Obviously, the best way is to pay the amount you owe and get a Release of Lien, but if you didn’t pay it when it was due, you probably can’t pay it now either.
If this is the case, you can ask for a payment arrangement from the IRS. The payment arrangement makes it possible to pay your debt off over time. The IRS will look at your finances and decide how much you can pay each month to satisfy the debt. The IRS will then send you a formal agreement showing the details of the payment arrangement.
Once you have a payment arrangement, it’s up to you to stay current on it. In order to get VA financing, you’ll need to not only show that you have a payment arrangement, but prove that you have made at least 12 payments on time on the payment plan. If this is the case, then you may be able to find a VA lender willing to give you a loan.
The Other Requirements
Just because you have a payment arrangement in place, though, doesn’t mean that you will automatically be able to get a VA loan. You must prove that you qualify for the loan in all aspects of your financial life. This means:
- At least a 620 credit score
- A maximum 43% total debt ration including the IRS tax lien payment
- Stable income/employment
- Enough entitlement to get the VA loan
- No recent bankruptcies or foreclosures
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Compensating Factors
It’s important to know that the VA doesn’t underwrite, approve, or fund VA loans. They have VA-approved lenders that do the work for them. Because the lenders are the ones that take the risk, they have the final say in whether you can secure VA financing with a tax lien or not. Some lenders simply use the above guidelines and approve you if you meet them. Other lenders want what they call compensating factors or factors that make up for the risky tax lien. They include:
- Assets on hand – Lenders like to see that you have funds available should you have a financial emergency. If you don’t have excess funds, you might be unable to pay your mortgage should an emergency occur. This increases the risk of your loan.
- Low debt ratio – Even though the VA allows a 43% total debt ratio in most cases, it can be too high for some lenders. They may require that you have a lower total debt ratio in order to lower your risk of default.
- Higher credit score – Some lenders aren’t comfortable accepting a credit score of 620 on a borrower that has a tax lien. They may have stricter credit score requirements again, to lower the risk of default
- Increasing income – If you have income that increases year after year, lenders may view you as low risk. They want to know that your employment is steady and your income continually rises so that you can keep up with the cost of living.
The Destruction a Tax Lien can Cause
VA lenders need to be careful when they take on a borrower that has a tax lien. This is because the IRS takes precedence over any lien on the property. Even if your mortgage was on your home first, the IRS tax lien will overtake it. This puts the first mortgage company in second lien position. If you defaulted on your loan and lost your home in foreclosure, the first lien paid off will be the IRS lien. This is a risky position for VA lenders, which is why they have to be so careful.
If you have compensating factors that make up for the tax lien and/or you have a great explanation for the presence of the tax lien, you can increase your chances of getting a VA loan. The best thing that you can do is try to make good on the lien, though. Even if you can pay a large portion of it up front and then getting a payment arrangement for the rest, you give yourself better odds of securing a VA loan.
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