Lenders may ask that you pay off your lien.
Tax liens are one of the most atrocious offenses in the credit reporting world and, unlike other kinds of negative information, can stay on your report forever, according to Equifax. Getting a mortgage with a tax lien on your record is a possibility, but it depends on the status of the lien.
Identification
Lenders can decide to whom they want to give a mortgage, so you can get a mortgage with anything on your record, even a tax lien. A tax lien, however, is likely to do severe damage to your credit score, so expect a high interest rate even if you find someone willing to lend you money. Nothing stops you from purchasing a home in cash, but the IRS could go after that property too.
Considerations
Whether you pay your tax lien makes a huge difference. When you have an unpaid tax lien, the IRS usually has priority over all other creditors. This makes it extremely risky for the bank to lend you money, because you already have money problems. If you default or declare bankruptcy, the IRS would get paid first from the sale of the home. A tax lien gives the IRS priority to all property you acquire after the notice of the lien, not just a specific asset, according to Tax Debt Help.
Subordinate Lien
The IRS sometimes authorizes a subordination of the lien -- giving secured creditors higher priority on the claims list -- when it deems it in the best interest of the government. You would have to prove that the IRS benefits from you owning the home, such as getting rental income, or that the subordination poses no threat to the IRS receiving its money, suggests Bank Rate.
Tip
Getting a mortgage is tough enough with a paid tax lien on your record, but it cannot hurt to see how lenders respond to your credit history. You should, however, deal with your tax debt. The IRS may accept a partial payment on your tax bill, called an offer in compromise. You could also wait until the debt becomes noncollectable in 10 years. Once the statute of limitations passes or you pay your lien, dispute it with the credit rating agencies. Debtors sometimes find that the IRS does not bother wasting its resources on responding to credit agencies once they receive their money, according to Carreon and Associates.
