Do you have a payment plan with the IRS because you couldn’t pay your taxes? You might think that it makes you ineligible to get a mortgage, but that may not be the case. Keep reading to learn how a payment plan may affect your ability to get a loan.
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Fannie Mae Loans Aren’t an Option
We’ll get the bad news out of the way first – you can’t use a Fannie Mae loan if you have an IRS payment plan. They simply don’t allow it. But, if you have good enough credit to get a conventional loan, Freddie Mac loans do allow it, so it’s not a bid deal.
Just because Fannie Mae doesn’t allow it, though, there are many other loan programs including all of the government-backed programs, such as FHA, VA, and USDA loans.
The Important Detail
The most important detail you should focus on is making your payments on time. The loan programs and lenders don’t focus on the fact that you have a payment arrangement. What they focus on is your payment history with the payment arrangement, just as they do for your other bills, such as house payments, credit cards, and personal loans.
What most lenders want to see is on-time payments for the last 12 months. In other words, you have to wait to apply for the mortgage until you’ve made 12 payments and each of those payments must have been made on time. If you have a late payment within that timeframe, you’ll have to start all over again until you have 12 months in a row that you don’t have any late payments.
The Debt Ratio
Aside from the timely payments, you must prove that the debt fits into your debt ratio. Lenders need to make sure that you don’t exceed the debt ratios already set for each program. For example, if you want a conventional loan, you’ll need a debt ratio no higher than 36%. If you apply for an FHA loan, you can have a debt ratio as high as 41% and a VA loan allows a DTI as high as 43% in some cases.
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The lender needs to make sure that you can comfortably afford all of your debts including the new mortgage and the IRS payment arrangement. The debt ratio ensures that you have enough disposable income each month in order to cover the cost of living without having to sacrifice.
Increasing Your Chances of Approval
If you are worried about your chances of approval because of your IRS payment arrangement or your debt ratio, consider coming up with compensating factors. These are factors that offset your risk of default. Some of the most common factors include:
- A high down payment – The more money you invest in the home, the lower your chances of default become because you don’t want to lose your own investment.
- A high credit score – If you have a high credit score, it can offset the risk that your tax liability causes. A high credit score shows lenders that you are financially responsible and a low risk of default.
- A low debt ratio – Just because loan programs have maximum debt ratios, it doesn’t mean that you should max out your debts. The lower your debt ratio is, the lower your risk of default becomes, which makes it easier for you to qualify for the loan.
The IRS payment plan can affect your ability to get a loan only if you don’t pay it on time or if it makes your debt ratio too high. Evaluate your income and debts to see if you can fit a mortgage payment into it while meeting the debt ratios discussed above.