How to Get a Mortgage With a Tax Lien: Step-by-Step Strategies
Getting a mortgage with a tax lien requires either resolving the debt or having an active payment plan in place. While traditional lenders typically require full resolution, alternative financing options like DSCR loans and hard money lending provide viable paths for borrowers who are actively managing their tax obligations. This guide walks you through the exact steps to secure mortgage financing regardless of your tax lien status.
Understanding Why Tax Liens Complicate Mortgage Approval
Before diving into solutions, it helps to understand why tax liens create such significant obstacles in the mortgage process. A tax lien represents a legal claim by the government against your property and assets, and this claim takes priority over most other creditors, including mortgage lenders.
The Priority Problem
When you apply for a mortgage, the lender wants assurance that if you default, they can recover their investment through foreclosure. A federal or state tax lien essentially tells the lender they're standing in line behind the IRS, which dramatically increases their risk exposure.
Public Record Impact
Even though tax liens no longer automatically appear on credit reports (as of 2018), lenders conduct thorough public records searches during underwriting. They will discover any outstanding tax liens, regardless of what your credit report shows.
Debt-to-Income Complications
Tax debt, including any payment arrangement, adds to your overall debt burden. Lenders factor this into debt-to-income calculations, potentially reducing the loan amount you qualify for or disqualifying you entirely under conventional guidelines.
Step 1: Determine Your Tax Lien Status and Amount
The first step in getting a mortgage with a tax lien is understanding exactly what you're dealing with. Different strategies work better depending on your specific situation.
Obtain Official Documentation
Request the following from the IRS or your state tax authority:
- Notice of Federal Tax Lien (Form 668): Shows the exact amount owed and filing date
- Account Transcript: Provides complete payment history and current balance
- Payoff Amount: The total needed to fully satisfy the lien, including penalties and interest
Categorize Your Situation
Your path forward depends on several factors:
Small Liens (Under $10,000): Often manageable through full payoff or quick subordination approval. Many borrowers can resolve these entirely before closing.
Medium Liens ($10,000-$50,000): May require subordination, payment plans, or alternative financing products. Traditional mortgages remain possible with the right strategy.
Large Liens (Over $50,000): Typically require either substantial resolution progress or alternative financing products like DSCR loans that focus on property income rather than personal finances.
Step 2: Establish a Payment Plan if Not Already in Place
If you cannot pay your tax lien in full, establishing a formal payment arrangement with the IRS demonstrates good faith and opens doors with many lenders. This step is absolutely critical for mortgage approval.
IRS Installment Agreement Options
Guaranteed Installment Agreement: Available for debts under $10,000 if you've filed all returns and haven't had an installment agreement in the past five years. The IRS must approve this request.
Streamlined Installment Agreement: For debts between $10,000 and $50,000. You can apply online and typically receive approval within days. Requires agreement to pay within 72 months.
Non-Streamlined Installment Agreement: For larger debts, requiring detailed financial disclosure and IRS review. Processing takes 30-90 days but establishes the formal arrangement lenders want to see.
Payment Plan Requirements for Mortgage Approval
Most lenders who work with borrowers on payment plans require:
- A minimum of 3 consecutive on-time payments (some require 12 months)
- Proof that the payment plan is current and in good standing
- Written confirmation from the IRS of the arrangement terms
- Evidence that you can afford both the tax payments and the proposed mortgage payment
Step 3: Request IRS Subordination for Traditional Mortgages
Subordination is a powerful tool that doesn't eliminate your tax lien but allows the mortgage lender to take priority position. This makes traditional mortgage financing possible even with an active lien.
How Subordination Works
When the IRS agrees to subordinate, they're saying the mortgage lender can be repaid first if you default and the property is sold. The IRS remains in line, but behind the mortgage holder.
Filing for Subordination
Submit Form 14134 (Application for Certificate of Subordination of Federal Tax Lien) with:
- A copy of the proposed mortgage terms
- Evidence that subordination will help you pay the tax debt faster
- Proof that the lender requires subordination
- Any supporting documentation showing benefit to the government
Subordination Approval Factors
The IRS considers whether subordination:
- Makes it easier for you to pay your tax debt
- Allows refinancing that frees up cash flow for tax payments
- Enables a construction project that will increase your ability to pay
- Protects the government's interest while facilitating legitimate borrowing
Processing Time: Expect 45-60 days for subordination approval. Factor this into your mortgage timeline and communicate with your lender about the expected schedule.
Step 4: Explore Alternative Financing Options
When traditional mortgage paths are blocked or take too long, several alternative financing products offer solutions for borrowers with tax liens.
DSCR Loans for Investment Properties
DSCR (Debt Service Coverage Ratio) loans evaluate the property's income potential rather than your personal financial situation. These loans have become increasingly popular among real estate investors with tax complications.
DSCR Advantages With Tax Liens:
- No tax return verification required with many lenders
- Focus on rental income covering the mortgage payment
- Less concern with personal tax issues if property cash flows properly
- Approval possible with active liens (no subordination needed)
- Typical rates of 8-11% with 20-25% down payment
Best Candidates for DSCR:
- Investment property purchases or refinances
- Properties with strong rental income documentation
- Borrowers who need faster approval than subordination allows
- Those with tax liens too large for easy subordination
Hard Money Loans for Quick Funding
Hard money loans are asset-based financing that prioritizes property equity over borrower credit history. These work well when timing is critical.
Hard Money Characteristics:
- Approval based primarily on property value and equity
- Closing possible in 7-14 days
- Less concerned with tax liens if substantial equity exists
- Higher rates (10-15%) and shorter terms (6-36 months)
- Best for fix-and-flip projects or temporary financing needs
Bridge Loans for Transitional Situations
Bridge loans provide short-term financing while you work toward a permanent solution. These are particularly useful when you're actively resolving a tax lien but need immediate funding.
Bridge Loan Strategy:
- Secure bridge financing to complete a construction project or acquisition
- Use project proceeds or refinancing to resolve the tax lien
- Refinance into conventional permanent financing once lien is cleared
Use our commercial mortgage calculator to estimate payments across different loan scenarios.
Step 5: Prepare Comprehensive Documentation
Regardless of which financing path you choose, thorough documentation accelerates approval and demonstrates your creditworthiness despite the tax lien.
Essential Documents to Gather
Tax Lien Documentation:
- Official lien notice showing amount and filing date
- Current balance statement from the IRS
- Payment plan agreement (if applicable)
- Payment history showing compliance
- Subordination approval (if obtained)
Financial Documentation:
- Two years of tax returns (showing current filing compliance)
- Bank statements showing ability to make payments
- Asset verification for down payment and reserves
- Business financial statements if self-employed
- Proof of income from all sources
Property Documentation:
- Purchase contract or refinance details
- Appraisal or property valuation
- Rental income documentation for investment properties
- Construction plans and budgets for construction loans
Write an Explanation Letter
Craft a clear, honest letter explaining:
- How the tax lien occurred
- Steps you've taken to address the situation
- Your current payment arrangement and compliance history
- Why you're confident you can manage both the tax payments and mortgage
- Long-term plan for complete resolution
Step 6: Choose the Right Lender
Not all lenders handle tax lien situations equally. Selecting the right lending partner significantly impacts your approval odds and terms.
Lenders Who Work With Tax Liens
Portfolio Lenders: Banks and credit unions that keep loans on their own books have flexibility conventional lenders lack. They can evaluate your complete picture and make exceptions.
Non-QM Lenders: These specialize in borrowers who don't fit conventional guidelines. Tax liens fall squarely within their expertise, and they offer products designed for these situations.
Private Lenders: Hard money and bridge loan providers focus on asset value, making them less concerned with tax issues if property equity is strong.
Questions to Ask Potential Lenders
- Do you have specific programs for borrowers with tax liens?
- What documentation do you require regarding my tax situation?
- Do you require subordination, or do you work without it?
- What's your typical timeline for approval with tax lien cases?
- Can you provide pre-approval before subordination is complete?
Step 7: Time Your Application Strategically
Timing your mortgage application correctly can make the difference between approval and denial.
Optimal Timing Scenarios
Best Timing: Apply after at least 12 months of payment plan compliance. This demonstrates sustained commitment and satisfies most lender requirements.
Good Timing: Apply with subordination already approved and in hand. This removes the major objection traditional lenders have.
Acceptable Timing: Apply with 3-6 months of payment history and strong compensating factors (high down payment, excellent credit otherwise, substantial assets).
Challenging Timing: Applying immediately after establishing a payment plan or before any resolution steps. Consider alternative products like DSCR loans for faster approval.
Construction Loan Specific Considerations
Construction financing with a tax lien requires additional planning because these loans carry inherent risk that lenders carefully evaluate.
Construction Lender Concerns
Construction lenders worry about:
- Your ability to manage project finances while paying tax obligations
- Risk of IRS levying accounts containing construction draw funds
- Potential for contractor payment issues creating mechanic's liens
- Project completion delays from financial complications
Strategies for Construction Loan Approval
Demonstrate Project Viability: Present detailed plans, budgets, and contractor qualifications showing the project will succeed regardless of your tax situation.
Provide Substantial Equity: Down payments of 30-40% demonstrate commitment and reduce lender risk exposure.
Separate Project Accounts: Establish dedicated accounts for construction draws that maintain clear separation from personal finances the IRS might access.
Show Clear Exit Strategy: Explain how the completed project (through sale or refinancing) supports both mortgage repayment and tax debt resolution.
Take Action Today
Getting a mortgage with a tax lien is absolutely achievable with the right strategy and lending partner. The key requirements are either resolving the lien or having an active payment plan in place, combined with choosing a financing product that fits your specific situation.
Contact Clear House Lending today to discuss your tax lien situation and explore your mortgage options. Our specialists work with complex financial situations daily and can identify the fastest path to approval for your circumstances.
Whether you need a DSCR loan for investment property, bridge financing while you resolve your tax obligations, or guidance on positioning yourself for conventional mortgage approval, we have the expertise and lender relationships to help you move forward.
Apply now to start your confidential consultation. We'll evaluate your complete financial picture and recommend the optimal strategy for securing the mortgage financing you need.
Ready to get your mortgage despite a tax lien? Speak with our lending specialists for a personalized assessment and clear action plan tailored to your situation.