You don’t have to pay your back taxes to get a mortgage

Back taxes = no mortgage (until now)

If you are paying back taxes with an installment plan, most mortgage programs required you to clear your tax debt before getting a mortgage. Until today.

Fannie Mae clears the way

Mortgage giant Fannie Mae sent out an update today to its lenders allowing them to approve applicants who owe back taxes. The change is effective immediately.

You don’t have to clear your tax debt before buying or refinancing a home. However, you do  have to meet a couple of criteria:

• The lender must document that you have an approved IRS installment agreement in place. It must indicate the terms of repayment, including the monthly payment amount and total amount due.
• In addition, you must be current on your monthly installments. You can prove this by supplying the most recent payment reminder from the IRS. That will show the last payment amount and date, and the next payment amount owed and due date.

Finally, you cannot have an IRS lien on your home. That’s what happens when you ignore tax debt or fail to set up or stick to a repayment plan. The IRS liens your home, and to lenders it appears that the only reason you are making installment payments now is that the IRS forced you to.

Payments count

Your lender won’t completely ignore your IRS obligation, however. Your monthly payment will be included in your debt-to-income ratio (DTI), which could reduce what you’re allowed to borrow.

For instance, 43 percent is a common threshold for mortgage programs: below 43 percent is good, above 43 percent is bad. So if you earn $5,000 a month and make a $300 a month tax payment, at a 4 percent rate, you could borrow almost $63,000 less with the tax lien than without it.

Practical matters.

If you plan to buy or refinance a house while repaying back taxes, it might help to negotiate a lower monthly payment and longer repayment period with the IRS. That way, you’ll qualify for more financing if you need it.

Alternatively, go for the highest payment you can possibly make, pay that thing off as fast as possible, and apply for your next mortgage with a clean slate.

What are today’s mortgage rates?

Current mortgage rates are significantly higher than they were a couple of weeks ago. However, understand that you can offset some of that increase by shopping aggressively for your home loan.

For instance, data show that mortgage rates can vary between lenders by .25 percent (conforming) to .50 percent (non-conforming) on any given day for the same loan. That dwarfs a .125 percent increase in overall rates. It pays to shop, and that’s easy to do right here.