How Do Tax Liens Affect Credit? Can You Get Loans?

How Do Tax Liens Hurt Your Credit? And What Should You Do About It?

Q: Can I get a loan to pay off a tax lien?

Yes, people often take out loans to pay off tax liens. If you are using collateral to get the loan, the lender may require you to get the tax lien subordinated. The IRS will generally agree to subordination when you are taking out a loan to pay off back taxes.

Q: Can you buy a house with a tax lien?

If there is a tax lien against you, the lien will attach to your new home as soon as you buy it. If you are taking out a mortgage loan, the lender will typically only approve you if you get the lien subordinated, discharged, or withdrawn.

IRS and state tax liens do not appear on credit reports – that means they don't affect your credit score, but they're public records, so they do affect your ability to borrow money.

If the IRS or a state revenue agency has filed a tax lien against you, lenders will find it in the underwriting process, but that doesn't necessarily mean you can't get loans. You just need to understand how the lien affects your creditworthiness and how to deal with tax liens when applying for loans.

Read on for more details or use TaxCure to find a licensed tax professional today.

Key takeaways

Tax liens don't appear on credit reports – they don't directly affect your credit score.
Tax liens are public record – they do affect your ability to borrow money.
Liens make you look like a high-risk borrower, potentially leading to rejections or higher interest rates.
To get loans, you may need to get the lien subordinated, discharged, or withdrawn.
Use TaxCure to find a licensed tax professional to help you resolve IRS and state tax liens.

How tax liens affect your ability to borrow money

When you apply for a loan, the lender typically starts the process by looking at your credit report and your income. They'll also review your application, which should list all of your debt, including the tax debt, if you filled out the form accurately.

Once the lender has reviewed the basics, they send the loan to underwriting. At this point, the underwriters will see the lien – whether or not you reported it on your application. Here's how the tax lien affects your ability to borrow money:

Loan denial – the lender may deny your request for the loan due to the lien. If you didn't report the tax debt on your application, that may cause additional problems, as your application may be considered fraudulent, but generally, most lenders will see that as an unintentional oversight.
Labeled as a high-risk borrower – Tax liens make you look like a risky borrower. They essentially tell lenders that you didn't pay something you owed, so the lender may worry that you won't pay the loan you're applying for.
High interest rates or bad terms – Lenders often approve loans for high-risk borrowers, but to mitigate their risk, they charge high interest rates and/or offer bad terms, such as shorter repayment terms or adjustable interest rates.
Inability to use collateral – If you're applying for a loan backed by collateral, such as a car loan or a mortgage, the lender will not approve the loan until you deal with the lien (more on that below). Why? Because tax liens have superiority over liens that are filed later, and that means if you buy a new asset, the IRS or state's tax lien will attach to the asset in front of the lender's lien.
Debit to income ratio – the lien lets the underwriters know that you have tax debt and how much you owe. They'll take this into consideration when calculating your debt-to-income ratio, which directly affects how much you can borrow, the loan's terms, and your ability to get approved.

Can you get a loan if there's a tax lien against you?

Maybe – it depends on the type of loan, the rest of your financial situation, and what you do to take care of the tax lien.

In some cases, the lender may approve the loan even though you have a tax lien – that's most common when you disclosed the loan on the application, you're not borrowing against collateral, and your financial situation indicates that you can repay the loan.

Other times, the lender may deny the loan outright, or they may require you to deal with the tax lien before they approve the loan. Your lender or broker should be able to walk you through what you need to do, but you may need to get help from a tax professional in some situations.

Dealing with IRS and state tax liens when applying for loans

Here are the main ways that you may need to deal with an IRS or state tax lien if you are trying to borrow money:

Satisfy the lien

To satisfy the lien, you must pay your IRS or state tax debt in full. At that point, the agency will release the lien, meaning you have no additional responsibility to pay it. The public record of the lien will still exist, but that's typically not a problem for lenders once you've paid the tax debt.

Lien withdrawal

The IRS will remove (withdraw) tax liens from the public record if you set up a qualifying payment plan. Generally, you must owe under $25,000, set up payments with direct debit, and make three payments before the IRS will withdraw the lien. Then, the lender will consider that payment plan when assessing your debt-to-income ratios.

Lien subordination

Subordination is when the IRS or the state agrees to let its lien fall behind another lien in priority. Generally, lien priority is based on the order in which the liens were filed. For example, if you take out a mortgage, the mortgage lender's lien is in first place, and then, if the IRS issues a tax lien that falls into second place.

If you're trying to take out a mortgage and there's already a tax lien against your assets, the lender will not approve the mortgage because their lien will automatically fall behind the IRS's – that means if you default, the lender can't foreclose on your home. However, the lender may be able to approve you if the IRS agrees to subordinate its lien behind the lender's.

Typically, the IRS and most states will only agree to subordinate tax liens if doing so will help you to pay the tax. However, there may be exceptions.

Lien discharge

Lien discharge is when the IRS or the state removes the lien from a specific piece of property. Unfortunately, this may not help you get a loan as the agency isn't very likely to discharge the lien from a new piece of property – for example, a car or home you're trying to buy.

However, the agency may discharge the lien from property that has no value or in cases where you have other property that's worth significantly more than the lien. A tax professional can let you know if a lien discharge may be able to help you get a loan in your situation.

Tax liens and mortgages

A tax lien will affect your ability to get a mortgage, but it will not necessarily prevent you from getting a mortgage. Typically, it's hard to qualify for a conventional mortgage if there's a tax lien against you, but you may get approved for a VA or FHA mortgage if:

You've entered into a repayment plan, or
The IRS has agreed to let you delay repaying the tax debt (for example, your account is marked as currently not collectible.

If you're making payments, the mortgage lender will consider the payments when calculating your debt-to-income ratio. You may need to be on the payment plan for a few months or potentially even a year before the lender will approve the mortgage. You may also need to get the tax lien subordinated by the IRS.

Refinancing loans when there's a tax lien against you

Tax liens can also complicate your ability to refinance existing loans. Again, the lender will take the tax debt into account when calculating your debt-to-income ratio and when assessing your creditworthiness. But it's often easier to refinance a loan than to get a new one.

The IRS will generally discharge or subordinate its lien if you're refinancing against one of your assets to pay off your tax debt. The agency may also agree to subordinate if you're refinancing to get lower monthly payments, so that you can make payments on your tax debt.

What to do if you want to get a loan and you have a tax lien

If you're already on a payment plan with the IRS or the state, simply apply for the loan and disclose the payment plan on your application.

Otherwise, consider these steps:

Figure out how much you owe – Contact the IRS or the state to see how much you owe.
Pay the tax debt or make payment arrangements – If possible, pay the tax debt in full and ask the agency to withdraw the lien from the public record. Otherwise, apply for an installment agreement or another resolution option – a tax professional can help you find the best option for your situation.
See if you can get the lien withdrawn – If you set up a qualifying IRS payment plan, the IRS will withdraw the lien, but you need to make sure you establish the payment plan as required. States have varying rules – reach out to the state department of revenue to learn more.
Stay compliant with future tax obligations – To avoid getting further into IRS tax debt, make sure you file all returns on time and pay estimated taxes if required.
Look into alternative lenders – if you can't get a loan due to the tax lien, you may want to look into alternative lending options, such as high-risk lenders, owner-carry loans, or peer lending, but make sure you do your research so that you don't get into a predatory loan or a loan you can't afford to repay.

It is possible to borrow money if there's a tax lien against you, but it can be challenging and often requires additional steps or paperwork.

FAQs about tax liens and creditworthiness

You want to get a loan but are worried about your tax liens – to help you out, here are more answers to taxpayers' most commonly asked questions.

Does a tax lien affect your credit?

A tax lien affects your ability to borrow money and your creditworthiness, but it does not affect your credit score.

Do IRS payment plans affect credit scores?

No, IRS payment plans do not appear on credit reports, and they do not affect your credit score. However, lenders will take your monthly payments and your total amount owed into account when calculating your creditworthiness.

Do tax liens appear on credit reports?

No, tax liens do not appear on credit reports. The three major credit reporting bureaus (Equifax, Experian, and TransUnion) stopped recording tax liens on their reports in 2018. However, tax liens are public record, and they will generally show up during the underwriting process or in a title search when you're applying for loans.

Can I get a loan to pay off a tax lien?

Yes, people often take out loans to pay off tax liens, but if you're using collateral to get the loan, the lender may require you to get the tax lien subordinated. The IRS will generally agree to subordination when you're taking out a loan to pay off back taxes.

Can you buy a house with a tax lien?

If there's a tax lien against you, the lien will attach to your new home as soon as you buy it. If you're taking out a mortgage loan, the lender will typically only approve you if you get the lien subordinated, discharged, or withdrawn.

Does paying a tax lien improve your credit?

Paying a tax lien does not affect your credit score, but it does improve your creditworthiness. It is easier to get approved for loans with good terms if you do not have any tax liens filed against you.

Get Help Dealing With IRS Tax Liens

Dealing with tax liens requires the right knowledge and experience – TaxCure makes it easy to find help. Start your search now and narrow down the results so you only see tax professionals who have experience resolving tax liens. If you're dealing with state tax liens, use the filters to ensure you only see results from tax pros who have experience in that state.