Will late filing affect my mortgage chances if I'm paid up w/the IRS?

March 1, 2018 7:06 AM

I've decided now's the time to buy a house. But I was way behind on filing and (sort of) paying taxes. If I am paid up and in good standing with the IRS when transcripts are pulled, will that red flag me for getting a mortgage? More (U.S.-based) details inside.

I managed to get very behind on filing taxes while I was self-employed, and that snowballed significantly.

I caught up on tax years 2009 to current (including 2017) in January, and received the notices for penalties owed and am paying those up as well. (Fun story - you can only make two online payments per day, apparently.)

By the time a lender or whomever pulls my actual IRS transcripts, they should show that I do not owe anything outstanding to the IRS - but I presume it would show I was very late in filing / paying. But that I'm also paid up.

Will that red flag me for a mortgage? I had a pre-approval that showed I was qualified for a loan upwards of $700K and my FICO is mid-700s. The IRS has never come after me, there's never been any collections or court actions.

Any similar experiences or advice welcome. Bonus points if you actually work in lending and have direct knowledge of how they look at this. No need to lecture me on the inadvisability of being in this situation in the first place - I'm well-aware. Thanks!

posted by anonymous to Work & Money (5 answers total)

You'll be fine.

I had the same situation. In my case, the lateness of filing was not an issue, as long as I was current, but I did have to get a form from the IRS showing that everything was paid in full. And I think it was only an "issue" because it was an FHA loan.

If I remember correctly, I could have also just shown that payment arrangements were made and on time, as long as the amount of the payments didn't impact the amount of the mortgage payment I could make. I opted to just pay it off as a lump sum. It was a morning's worth of work and waiting in an IRS office, but otherwise painless.

You might get ahead of the curve and make things go faster by addressing it up front and ask the lender what paperwork they require in order to show you are current. They may not need any. In my case, it only came up after the loan went to the underwriters, so it delayed the process a day or two while I got my paperwork.
posted by The Deej at 7:21 AM on March 1, 2018

A lender or credit agency cannot "pull your tax transcripts." They have no legal access to your tax returns other than copies you provide them.

As for debt to the IRS, the only way they know is if your debt was more than $10,000 and you did not create an IRS installment plan. In that case the IRS can file a tax lien which becomes a public record. If you did not have a lien filed against you, you shouldn't have anything to worry about. They won't know anything about it.

However, you are required to disclose any current debts outstanding you have when applying for a loan.
posted by JackFlash at 8:34 AM on March 1, 2018

When I applied for my mortgage, I supplied my own tax forms. I was preapproved without any fuss. When I actually found a place, made an offer and got mutual acceptance, in the 30 day closing period, the lender reached out to the IRS and verified the transcripts matched. That's it. When they were filed didn't matter at all... this part is about proof of income, not proof or reliability. That's what your credit score is for.
posted by pazazygeek at 8:58 AM on March 1, 2018 [1 favorite]

I should clarify, some mortgage lenders may want verification of your IRS tax forms. You must provide permission for this using Form 4506-T to have the IRS release them. The transcripts aren't a copy of your returns but have certain line items and may also show any penalties paid. But if you are currently up to date on your taxes, it shouldn't be a problem.
posted by JackFlash at 9:08 AM on March 1, 2018 [1 favorite]

A close business associate of mine (also freelancer) just bought a house, and he had not filed or paid anything at all in like 8 or 9 years. Basically his entire self employed career he was like nope-don't-want-to-think-about-it and so he didn't. Against my advice he went to some cheap-o book keeper, they filed all of his old tax returns mostly incorrectly, and he was... approved no problem for a mortgage.

He said he said for the amount of effort and stress it caused him, it was anticlimactic when the bank didn't seem to really care that much about his tax situation. He ended up going to a real small biz accountant to sort out the mess and pay off whatever he owed, but that was after he got the house.
posted by bradbane at 5:17 PM on March 1, 2018 [1 favorite]