FHA loan rules for loan approval include instructions to the lender about unpaid federal debts and tax liens.
Your chosen participating FHA lender is responsible for verifying your income, employment record, and your monthly financial obligations-which may include tax obligations such as a lien, or a federal debt. Unresolved taxes and federal debt can be a serious issue that will affect a home loan application.
The status of such debt is one of the most important factors. According to HUD 4000.1, “Mortgagees are prohibited from processing an application for an FHA-insured Mortgage for Borrowers with delinquent federal non-tax debt, including deficiency Judgments and other debt associated with past FHA-insured Mortgages.”
The FHA loan rules in this section also add that the lender is required to determine “whether the Borrower(s) have delinquent federal non-tax debt. Mortgagees may obtain information on delinquent Federal Debts from public records, credit reports or equivalent…”.
In such cases, the word “delinquent” is the key-a borrower who is not delinquent and is making payments according to the agreed-upon plan may have a great deal less to worry about than someone approaching the FHA loan application process with an unresolved payment situation.
And what does HUD 4000.1 say about delinquent tax debt? Quite simply, “Borrowers with delinquent Federal Tax Debt are ineligible” for FHA home loans.
Unpaid tax liens are also addressed in HUD 4000.1, stating that the entire amount is not required (by the FHA) to be paid off.
“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. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments.”
Your lender will be required to include the payment amount in the debt-to-income ratio calculation.
Some FHA loan applicants might glance at this section of the rules and assume that unpaid federal debt automatically disqualifies them from applying for an FHA loan, but it’s important to remember that as long as you can document a satisfactory payment arrangement, the real issue is how the monthly payments affect the debt ratio.
Your lender may require additional documentation in cases like these-be prepared to show copies of any written payment agreements made between you and the agency you have made payment arrangements with.