Some borrowers come to the FHA home loan process with different financial issues than others. For example, freelance, contract, and gig economy workers may encounter higher levels of federal tax debt issues than those who are “regular” full time employees.
If a house hunter wants to purchase a home with an FHA mortgage, rehab loan, or have a property built for them with an FHA One-Time Close construction loan, what do FHA loan rules say about a borrower’s unpaid tax debt?
There are rules for both federal tax debt and federal non-tax debt and how the lender must view these obligations. Additional lender standards may apply above and beyond FHA mortgage loan rules so it’s important to remember that what is discussed here is strictly the FHA loan program’s policies.
Those policies include a requirement that there be no delinquent tax debt, as well as a zero-tolerance policy for “deficiency Judgments and other debt associated with past FHA-insured Mortgages”, once the lender has verified the existence of such issues.
But a borrower who has tax or non-tax federal debt and who has entered into a satisfactory repayment program may find they are still able to apply for an FHA mortgage.
In these cases, FHA loan rules require the lender to verify a minimum number of payments have been made and that the repayment plan activity does indeed meet the creditor’s requirements.
Borrowers who have tax liens against them are not required to pay off those liens in full as long as the satisfactory payment activity is documented and the minimum payments have been made.
What are those minimum payments?
According to HUD 4000.1, the FHA Loan Handbook, “Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the Borrower has made timely payments for at least three months of scheduled payments.”
It is very important to know that the FHA loan program requires the actual three months of payments to elapse rather than a borrower attempting to pre-pay three months’ worth and applying for the mortgage.
Some borrowers may wonder if it’s “safe” to simply keep quiet about their federal tax or non-tax debt issues when applying for a home loan. But all applicants should know that the FHA policy on this issue puts the burden of checking on the lender regardless of what the borrower volunteers at application time. From HUD 4000.1:
“Mortgagees must check public records and credit information to verify that the Borrower is not presently delinquent on any Federal Debt and does not have a tax lien placed against their Property for a debt owed to the federal government.”