12-7-18: I have tax liens; will that prevent me from purchasing a new home?
Question of the week: I have tax liens; will that prevent me from purchasing a new home?
Answer: Liz is an attorney and specializes in negotiating settlements with federal and state tax authorities, and a friend of mine. We were having a few weeks ago and this question came up as we often have clients that have state and/or federal tax liens and it was great to get some input on some options for tax liens.
Before we answer the question of whether tax liens will prevent you from obtaining a mortgage to purchase a new home, let’s answer the question: What is a tax lien?
A lien is the right to keep possession of someone’s property until a debt or obligation is paid. In the case of the government it is the right to take possession of someone’s property until a tax debt is paid—i.e. a tax lien.
If you have unpaid taxes and a lien has been filed against you the guidelines for all loans are that until the obligation is paid a loan will not be funded and closed.
Example: You are purchasing a new home for $575,000 and applying for a mortgage of $517,500 and are qualified to obtain loan approval. You have a lien for unpaid state taxes of $5000 from 2014 that is recorded in the county where you lived when the lien was filed. We submit your loan and the underwriter approves the application with a condition that we must show proof that the state tax lien from 2014 is satisfied and show evidence of where the funds for satisfying lien came from before the loan will be able to close. In many instances we coordinate satisfying the lien with the title company so you can pay the amount owed, initial amount plus penalties and interest, as part of the total funds needed for closing. Title will then guarantee to the lender, and you, the lien is paid and record the deeds needed for closing.
There are some instances with FHA mortgages where if you have established a payment plan to satisfy a lien recorded against you and are making payments on a constant and consistent basis. These situations are approved on a case-by-case basis, so if you are in such a situation do not assume you are automatically able to be approved. Before you write an offer and open escrow we would want to run your situation and any evidence through an underwriter for an opinion as to whether the lender would approve the loan with your payment agreement.
For unpaid taxes, or other debts, to become liens or judgments the obligation has to be outstanding for a fairly significant period of time. If you are aware of an unpaid obligation, especially taxes, it is strongly recommended you contact the public agency to which the obligation is owed and establish the amount owed and if necessary a payment plan. Many tax debtors are fearful of contacting the public tax authority thinking they may attach bank accounts or employment income to repay the back taxes due. This is not the case, these measures happen if a lien is filed and there has been no communication from you for a long period of time. Generally, for most private citizens for what the tax authorities would consider small amounts owed, the agency is willing to wait until you are forced to pay the tax obligation because you are purchasing a home or some other event.
Should you have an outstanding tax obligation it is strongly recommended you contact the agency to which the taxes are owed and negotiate a settlement amount and if you are unable to pay the full amount do at that time to set up a payment plan to pay off the taxes and retire the debt. In almost all cases, if you set up a payment plan and make the payments on time for the amount owed the agency will not file a lien against you. Depending on the loan type for which you are applying some lenders will approve and fund a loan if you show you are making consistent and timely payments on your obligation—counting the monthly payment amount as part of qualifying.
If you are having your pay garnished to collect a judgment or other obligation the garnishment is not considered a payment plan since it was not voluntary. Before a mortgage can be approved and funded the total obligation must be paid and the garnishment removed.
Prior to this year when running credit reports public records would show on the report that would impact whether we would be able to obtain loan approval, or what steps we would need to take to obtain loan approval: Federal and state income tax liens, county property tax liens, judgments from lawsuits or court cases, unpaid child or spousal support and bankruptcy being the most common. Beginning earlier this year these types of public records were no longer reported on credit reports, with some exceptions if a case somehow fell through the cracks.
Because a lien or judgment is not on your credit report does not mean we will not find out about it. As part of the mortgage process we obtain title insurance, part of the title insurance process is your completing a Statement of Information that includes name, addresses and employment for the past ten years, spouse(s), etc. The title companies runs this information through their data bases to determine if there are any public records filed in your name and notify us if that are any.
When there is a public record filed it needs to be addressed before we can obtain final loan approval and fund your mortgage. Because this is now the only way any public records will be discovered it is highly recommend you inform us at the beginning of the transaction if you have any public records for taxes, support payments, bankruptcy etc so we can begin working on the issue at the beginning of the transaction instead of waiting to find out from title closer to our scheduled closing date.
We have had transactions that have fell apart because borrowers delayed in completing their Statement of Information until close to closing, a lien popped up with title and we were unable to solve the issue in a timely fashion to satisfy the seller.
If you know, or suspect, there may be a lien let us know up front, complete a Statement of Information right away for title to run it through databases and if there is something filed we will have to ability to determine our best options and proceed accordingly.
Ignoring tax or other public record obligations thinking they will go away is not a long term success strategy. We have helped many families over the years with serious debt delinquency get their debt paid and in a position to purchase a home. The longer you wait to begin the process of satisfying the debt and clearing your public record the longer before you are free and clear. Start the process today, you will have a tremendous mental weight lifted just by beginning the process.
As always, if you or someone you know has public records and feel they will prevent obtaining a mortgage please contact me to discuss your situation and potential solutions we can begin to work on so you can become a homeowner.
Have a question? Ask me!
Higher loan limits for 2019 were announced by the Federal Housing Finance Agency. Starting for loans funded after January 1st, 2019 the conforming loan limit for single family residences (including condos) will increase from $453,100 to $484,250; for “high-balance” areas (LA and Orange Counties for example) the limits for Fannie and Freddie mortgages increase from $679,650 to $726,525. Will the loan limit increases have a dramatic impact on the housing markets? Not so much, at any given time the rate difference between the conforming loan amount and the high-balance amount is from one-eighth to one-quarter of one percent (0.125% or 0.25%). There will be some advantage to those borrowing more than the prior limit and at or below the new limit for high-balance as qualifying for the high-balance mortgage is generally easier than for “jumbo” or non-conforming mortgages.
November employment report contains no news that impacts rates. First Fridays are a big event for economic data geeks such as myself and investors as the Department of Labor releases job reports for the prior month. Today’s reports are nothing too exciting. The economy created 155,000 new jobs last month, significantly less than the 237,000 in October and below the expectations of most investors; however the total jobs added is not insignificant and still reflect a healthy employment market. Enough jobs were added to keep the unemployment rate at a near 50 year low at 3.7%. Wages continue to grow, up 3.1% over the past year—a factor in whether the Fed will increase rates later this month.
Rates for Friday December 7, 2018: Last week’s WR&MU mentioned that Presidents Trump and Xi were meeting at the G20 summit to discuss the tariff disputes. Following the meeting they announced a 90 day moratorium on new tariffs and agreed to negotiate the recent tariffs enacted by both countries. The news was well met by investors and stocks and bonds improved. As the week has progressed many have noticed the decline in stock markets, due in large part to continued uncertainty as to the trade war truce. Rates have benefited from this uncertainty as the funds pulled out of stocks have flowed into long-term fixed assets, i.e. mortgages. As a result rates drop for the second Friday in a row and are at their lowest in three months.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 4.50% Down 0.125%
30 year high-balance conforming 4.75% Down 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
For the past year I have been listening to an incredibly detailed podcast about World War II. To give you an idea how detailed, the podcaster began the podcast in December 2011, this past week he finally got to Pearl Harbor—seven years to cover three to four years. As a history buff I love the detail, he spends about ten episodes just on Churchill, but now that I am caught up I will have to wait a week or more (he is great at putting together information and his commentary, not so great at sticking to a schedule) before his next podcast. I anticipate his completing the war in around 2026.
I bring this up because today is the anniversary of Pearl Harbor and I feel its importance in our nation has declined over the years—not surprisingly. When the Japanese planes approached Oahu and began their bombing and strafing many on the island, civilian and military, thought the planes were part of a drill—even as bombs exploded many thought there must have been some mistake made. Once reality hit the general attitude went from disbelief to anger very quickly. Sentiments quickly echoed across the country as the news was broadcast that Sunday.
In Gilmore, Iowa seventy-seven years ago a boy named Don had turned twelve that morning, and the radio told his parents and the community what had occurred in far off Hawaii earlier that day. I asked Don several years ago what was his memory of that birthday and Pearl Harbor. His response was, “I didn’t get a chance to ride the pony.” They lived on the farm and he had eleven brothers and sisters and before it was his turn to ride the family pony they were all called into the house.
Happy 89th birthday to Don McCormick, my father in-law.
On a final note, thank you to everyone who bore with my very long WR&MU last week and those who replied with positive comments!
Have a great week,
Dennis
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/My-Blog
