What blocks a mortgage is federal tax debt with no agreement in place. HUD Handbook 4000.1 makes borrowers with delinquent federal tax debt ineligible for FHA, and an installment agreement, the IRS's monthly payment plan, is the fix. Florida has no state income tax, so for most Florida buyers the only tax debt in question is federal.
The rule program by program
| Program | What's required with an IRS installment agreement |
|---|---|
| FHA | A valid repayment agreement, at least three scheduled payments made on time, and no prepaying to reach three. The payment counts in your ratios. If a tax lien was filed, the IRS has to subordinate it to the FHA mortgage |
| Conventional (Fannie Mae) | A copy of the approved agreement showing the monthly payment, plus proof you're current, such as the latest IRS payment reminder. A pending agreement works with a copy of the application. No Notice of Federal Tax Lien can be filed in the county where the home is, or the balance must be paid off |
| VA | Federal debts must be paid in full or under a written repayment agreement |
| USDA | A repayment plan approved by the IRS with at least three timely payments made |
The FHA language comes from HUD Handbook 4000.1 as quoted by HUD's Inspector General, and the rest comes from Fannie Mae's Selling Guide, VA's credit standards and USDA's HB-1-3555. Every program counts the monthly IRS payment as a debt in the debt-to-income ratio, the share of gross monthly income that goes to the house payment and other debts.
A worked example in Pinellas County
A buyer had a strong year of side work and owes the IRS $9,600. The installment agreement sets a $210 monthly payment, and four payments have been made on time. Income is $6,100 a month, and there's a $340 car payment.
Here's a $320,000 single-family home with FHA at 3.5% down and a 5.75% rate on a 30-year fixed, taxes at 0.95% of the price and insurance at $275 a month:
| Payment piece | Amount |
|---|---|
| Down payment (3.5%) | $11,200 |
| Total loan with 1.75% upfront MIP | $314,204.00 |
| Principal and interest | $1,833.61 |
| Monthly mortgage insurance (0.55% a year) | $141.53 |
| Property taxes | $253.33 |
| Homeowners insurance | $275.00 |
| Total payment | $2,503.47 |
The house payment is 41.0% of income. Adding the $340 car and the $210 IRS payment brings the total ratio to 50.1%. Both are inside FHA's 46.9% and 56.9% limits for an automated approval, so the buyer can close with the plan still running.
Paying the $9,600 off instead would lower the total ratio to 46.6%, and it would also use most of the cash that covers the $11,200 down payment. When the ratios already work, keeping the plan and putting savings toward the home usually leaves the buyer in better shape on closing day.
Timing when the agreement is new
FHA and USDA count months, so the date of your first payment sets the earliest closing. If the first payment went out last month, the third on-time payment lands two months from now, and FHA can close after that. A Conventional loan can move sooner when no lien has been filed, since Fannie Mae doesn't require a set number of payments.
Paperwork that keeps the approval moving
- The agreement itself. The IRS letter showing the balance, the monthly payment and the terms.
- Proof of payments. Bank statements showing each payment clearing, or the most recent IRS payment reminder showing the last amount paid.
- A lien check. A Notice of Federal Tax Lien recorded in the county turns up in the title search, so search the county's official records for your name before you apply.
- Filed returns. Lenders usually confirm income with IRS tax transcripts, so every required return should be filed.
If you haven't set up the plan yet, the IRS lets you apply for one online. Then run your income, your car payment and the IRS payment through the DTI calculator. When the third payment clears, call AAA Capital Funding at 888-601-8344 and we'll have the approval ready to go.