topic Re: IRS Installment plan in Mortgage Loans

IRS Installment plan

seanf12 — Fri, 11 May 2018 22:57:01 GMT

Applying for an FHA loan, and it’s my understanding that if you have entered into an installment plan with the IRS, you had to have made at least three payments before you can apply for the mortgage.

My scenario is that I entered into a plan last year for my 2016 taxes, and have made all payments on time since. However, I just had my 2017 taxes added to the installment plan, and my payment will be increasing by $60 in June. Do I have to make at least three payments with this new amount before I can be approved?

From a DTI standpoint, even with the new payment amount I am still in good shape

Thanks!

Re: IRS Installment plan

ShanetheMortgageMan — Fri, 11 May 2018 23:03:47 GMT

If it's not a tax lien, FHA only requires a payment plan to be established and that payment amount will be used to calculate your DTI. No payments are required to be made (unless there is a payment due). So, if this is you, just get a copy of the new payment agreement + make any payments payments that are due on time and you'll be good. Some lenders may have an overlay guideline requiring a certain amount of payments to be made, so make sure you address that early in the process so you know what to expect.

If you have a tax lien, then that is when FHA requires the payment plan + 3 months of payments to be made.

Re: IRS Installment plan

seanf12 — Fri, 11 May 2018 23:54:26 GMT

Thanks for the reply, although I’m not sure that’s entirely accurate? Everything I have read states that if you owe Federal Tax Debt, you are required to have made at least three monthly payments...

Re: IRS Installment plan

Anonymous — Sat, 12 May 2018 01:24:36 GMT

I am also making payments on my 2017 taxes. I was told by my LO that I needed to make one payment and also show the installment letter. I think 3 payments aren’t required as I don’t have a tax lien (it’s the most recent year and I haven’t defaulted on payment). I think you’ll be fine.

Re: IRS Installment plan

ShanetheMortgageMan — Sat, 12 May 2018 01:40:57 GMT

@seanf12 wrote:
Thanks for the reply, although I’m not sure that’s entirely accurate? Everything I have read states that if you owe Federal Tax Debt, you are required to have made at least three monthly payments...

I'm 100% certain it's accurate, because the information I told you is taken directly from the FHA guidelines which you can read yourself at https://www.hud.gov/sites/documents/40001HSGH.pdf (page 136, or .pdf page 151). You'll notice nowhere in the guidelines does FHA address tax liabilities that haven't turned into a tax lien, which is because FHA treats it just like any other delinquent installment debt that is owed.

I help other loan officers understand this information nearly daily and close loans all of the time under the same guideline.

Re: IRS Installment plan

Anonymous — Sat, 12 May 2018 05:12:40 GMT

@ShanetheMortgageMan wrote:
@seanf12 wrote:
Thanks for the reply, although I’m not sure that’s entirely accurate? Everything I have read states that if you owe Federal Tax Debt, you are required to have made at least three monthly payments...
I'm 100% certain it's accurate, because the information I told you is taken directly from the FHA guidelines which you can read yourself at https://www.hud.gov/sites/documents/40001HSGH.pdf (page 136, or .pdf page 151). You'll notice nowhere in the guidelines does FHA address tax liabilities that haven't turned into a tax lien, which is because FHA treats it just like any other delinquent installment debt that is owed.

I help other loan officers understand this information nearly daily and close loans all of the time under the same guideline.

Re: IRS Installment plan

me12345 — Sat, 12 May 2018 17:23:29 GMT

@ShanetheMortgageMan wrote:
If it's not a tax lien, FHA only requires a payment plan to be established and that payment amount will be used to calculate your DTI. No payments are required to be made (unless there is a payment due). So, if this is you, just get a copy of the new payment agreement + make any payments payments that are due on time and you'll be good. Some lenders may have an overlay guideline requiring a certain amount of payments to be made, so make sure you address that early in the process so you know what to expect.

I think that the confusion here is that MOST lenders and Investors have this "3 month re-payment plan" as an "Overlay" or requirement...If you are in this situation, you may have to do some searching for a lender that does not have these Overlays, be very clear in what you need when shopping for a lender.

Thanks,

Re: IRS Installment plan

Anonymous — Sat, 30 Jun 2018 02:58:31 GMT

Does anyone know if this is also the case for USDA? We are currently losing sleep because lender just asked for proof that 2017 & 2016 taxes have been paid to $0 balance. We recently set up an automatic payment plan with IRS online but first payment has not been made nor billed for. LO says adding this monthly payment does not negatively affect DTI ratio but I am still very concerned. Any help or input is appreciated.

Re: IRS Installment plan

Anonymous — Tue, 10 Jul 2018 16:46:12 GMT

BUMP

Re: IRS Installment plan

homeloanexpert — Fri, 13 Jul 2018 14:02:22 GMT

When you have an installment agreement with the IRS, State, etc. to pay back taxes, as long as you have made your 3 payments then you are good to go. Now in your case, you ended filing your 2017 1040's owing a balance that you didn't or couldn't pay. So, you must have contacted the IRS and requested a modification. If you hadn’t done that, then your prior installment agreement would have been canceled because you are required not to have any unpaid tax liability for the next year filed. Good Job for staying on top of things.

So, to circle back around, you had an installment agreement in place, as long as you didn't miss any payments, and you can show your new installment agreement, then you are good to go. Why? Because after 30 years in the biz, I have come across your scenario many times. But if you're that worried about it, you can request a UW Pre-Approval to put your worries at ease. I do this when I have a really tricky file that even baffles my mind, or I have a borrower who is really worried and wants the added security of a real approval, not just a pre-qualification letter from Johnny Bananas Loan Officer.

NOTE: You may find that an UW will request a statement of account showing how much you owe.

Hope this helps! Best wishes to you!

Re: IRS Installment plan

Anonymous — Tue, 17 Jul 2018 23:24:52 GMT

@homeloanexpert wrote:
When you have an installment agreement with the IRS, State, etc. to pay back taxes, as long as you have made your 3 payments then you are good to go. Now in your case, you ended filing your 2017 1040's owing a balance that you didn't or couldn't pay. So, you must have contacted the IRS and requested a modification. If you hadn’t done that, then your prior installment agreement would have been canceled because you are required not to have any unpaid tax liability for the next year filed. Good Job for staying on top of things.

So, to circle back around, you had an installment agreement in place, as long as you didn't miss any payments, and you can show your new installment agreement, then you are good to go. Why? Because after 30 years in the biz, I have come across your scenario many times. But if you're that worried about it, you can request a UW Pre-Approval to put your worries at ease. I do this when I have a really tricky file that even baffles my mind, or I have a borrower who is really worried and wants the added security of a real approval, not just a pre-qualification letter from Johnny Bananas Loan Officer.

NOTE: You may find that an UW will request a statement of account showing how much you owe.

Hope this helps! Best wishes to you!

My lender ended up approving us with the IRS installment plan. They just wanted proof it was set up and what the monthly payment amount was. It was included in our DTI ratio. We have not made 3 payments yet because 2016 & 2017 were just filed together this year and the installment plan was barely approved last month. Is the 3 payment rule only applicable when the tax debt has turned into a judgment or lien? In our case it never got to that point.

File was sent to USDA office for their committment and I am afraid that even though lender is okay with it, they may not be.

Re: IRS Installment plan

ShanetheMortgageMan — Wed, 18 Jul 2018 05:00:00 GMT

@Anonymous wrote:
My lender ended up approving us with the IRS installment plan. They just wanted proof it was set up and what the monthly payment amount was. It was included in our DTI ratio. We have not made 3 payments yet because 2016 & 2017 were just filed together this year and the installment plan was barely approved last month. Is the 3 payment rule only applicable when the tax debt has turned into a judgment or lien? In our case it never got to that point.
File was sent to USDA office for their committment and I am afraid that even though lender is okay with it, they may not be.

Correct, only if it's a judgment or lien. See HB-1-3555 SFH Guaranteed Loan Program Technical Handbook Chapter 10 which says: "Applicants who have an IRS tax debt are ineligible if a repayment plan is not underway. If a repayment plan is underway, the lender will determine if the repayment plan meets the criteria of a credit exception in accordance with Section 10.8 of this Chapter."

... then 10.8 says: "Evidence of payment arrangements is acceptable for IRS Federal tax judgments. The approved lender’s underwriter must determine if the elapsed portion of the repayment period is of appropriate duration. An applicant(s) who has been delinquent during the repayment period is ineligible for a guaranteed loan."

Later in Attachment 10-B, when specifically addressing tax liens, it says: "Tax liens may remain unpaid if the applicant has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the applicant has made timely payments for at least three months of scheduled payments. The applicant cannot prepay scheduled payments in order to meet the required minimum of three months of payments."

So you can see the 3 payments are only required when it's a tax lien. When it's not a tax lien, then it's up to underwriter discretion and it's very common in the industry to accept an IRS payment plan without having to make 3 payments (or even 1 payment). If the underwriter has accepted it and sent it off to USDA then I wouldn't worry about it.