You can get a conventional mortgage while you owe back taxes to the IRS, but only under specific conditions. Fannie Mae’s Selling Guide lets a lender approve you if you have an approved IRS installment agreement, you’ve made at least one payment on it, and there is no Notice of Federal Tax Lien filed against you in the county where the property sits.1Fannie Mae. Monthly Debt Obligations Miss any of those pieces and the fallback is to pay the full tax balance before or at closing.
The Two Conditions Fannie Mae Sets
Two things have to be true for your lender to treat the tax debt as an ordinary monthly obligation rather than a reason to deny the loan.
First, no Notice of Federal Tax Lien can be filed against you in the county where you’re buying. Second, the lender must have your approved IRS installment agreement in hand, showing the repayment terms, the monthly payment amount, and the total balance, along with proof you’re current.1Fannie Mae. Monthly Debt Obligations
The payment history bar is lower than most borrowers expect. Fannie Mae requires at least one timely payment before closing. The accepted proof is the most recent IRS payment reminder showing your last payment date and amount along with the next payment due date and amount.1Fannie Mae. Monthly Debt Obligations
If either condition fails, the guidelines give you one option: pay the entire outstanding tax balance before or at closing.1Fannie Mae. Monthly Debt Obligations There is no middle ground.
When a Federal Tax Lien Has Been Filed
A federal tax lien changes the picture. The IRS doesn’t file one on every taxpayer who owes money; it typically files a Notice of Federal Tax Lien after your balance passes a threshold and you haven’t responded to payment demands. Once filed, the lien attaches to everything you own, including real estate, and it competes with the mortgage lender for first position on the title. No conventional lender will accept second place behind the IRS.
Because of that, Fannie Mae’s installment-agreement workaround does not apply if a lien has been filed in the county where the subject property is located.1Fannie Mae. Monthly Debt Obligations You have to resolve the lien itself, not just the debt behind it. Two paths do that.
Lien Withdrawal
The IRS can withdraw a filed tax lien under certain conditions, including when you’ve entered into an installment agreement that will fully pay the taxes owed. You request withdrawal on Form 12277. The IRS will also consider withdrawal if doing so helps it collect the tax, or if the lien was filed improperly.2Taxpayer Advocate Service. Applying for Withdrawal of Notice of Federal Tax Lien Withdrawal removes the public notice entirely, which is the cleanest outcome for a mortgage application. A direct-debit installment agreement improves your odds of withdrawal because the automated payments reduce collection risk.
Lien Subordination
If withdrawal isn’t available, you can ask the IRS to subordinate its lien to the new mortgage. Subordination means the IRS agrees to let the mortgage lender take first priority on the title. You apply on IRS Form 14134, not Form 14138 (a common mix-up).3Internal Revenue Service. Form 14134 – Application for Certificate of Subordination of Federal Tax Lien IRS Publication 784 walks through the full process.4Internal Revenue Service. Publication 784 – How to Apply for a Certificate of Subordination of Federal Tax Lien
Subordination requests take time. The IRS reviews whether allowing the mortgage actually helps it collect the tax. Don’t wait until you’re under contract to start; if a lien has been filed, begin the application months before your planned purchase.
Getting the Installment Agreement in Place
The fastest route is the IRS Online Payment Agreement tool. If you owe $50,000 or less, you may qualify for a streamlined agreement that skips the detailed financial disclosures.5Internal Revenue Service. Internal Revenue Manual 5.14.5 – Streamlined, Guaranteed and In-Business Trust Fund Express Installment Agreements Mortgage underwriters prefer streamlined agreements because the documentation is standardized and easy to verify.
If the online tool isn’t available to you or you owe more than $50,000, mail Form 9465 to propose a monthly payment.6Internal Revenue Service. About Form 9465, Installment Agreement Request The IRS responds with a formal acceptance and may issue Form 433-D documenting the terms. A pending or proposed application won’t satisfy a lender; the agreement has to be fully approved.
Setup fees as of March 2026 depend on how you apply and how you pay:7Internal Revenue Service. Payment Plans Installment Agreements
- Direct debit, applied online: $22
- Direct debit, applied by phone or mail: $107
- Standard plan, applied online: $69
- Standard plan, applied by phone or mail: $178
- Low-income taxpayers: fee waived for direct debit agreements; $43 (reimbursable) for other plans
An Offer in Compromise, which settles tax debt for less than the full amount, is a legitimate IRS program but a poor fit here. Conventional lenders view an OIC cautiously as a sign of financial distress, and the process can run six months to a year or more. For most buyers, a standard installment agreement is faster and cleaner.
How the Monthly Payment Affects Your DTI
Your lender adds the installment agreement payment to your total monthly obligations when calculating your debt-to-income ratio. If you owe $30,000 and your agreement calls for $400 a month, that $400 counts the same as a car payment. The total balance itself isn’t in the DTI calculation; only the monthly payment is.1Fannie Mae. Monthly Debt Obligations Fannie Mae also allows the payment to be excluded from DTI in limited cases, such as when another party is making the payments or when the agreement qualifies as installment debt with fewer than ten remaining payments.
For manually underwritten conventional loans, the maximum DTI is generally 45%, though borrowers with weaker profiles may be held to 36%.8Fannie Mae. Eligibility Matrix Loans run through Desktop Underwriter can be approved at higher ratios with compensating factors, up to 50% in some scenarios.9Fannie Mae. Max Debt-to-Income Ratio Infographic
If your IRS payment pushes DTI over the limit, the fastest fix is usually paying down revolving credit card balances, because the minimum payment drops as soon as the balance does. You can also negotiate a longer installment term with the IRS to lower the monthly payment.
Documentation the Underwriter Needs
Missing or unofficial documents are the most common reason these files stall.
- The executed installment agreement showing your monthly payment, total balance, and terms. This is what the underwriter uses to calculate DTI.
- The most recent IRS payment reminder showing your last payment and next scheduled payment. Bank statements showing withdrawals work as backup.1Fannie Mae. Monthly Debt Obligations
- An IRS account transcript confirming your current balance and payment history. You can pull this from your IRS online account or request it with Form 4506-T.10Internal Revenue Service. Get Your Tax Records and Transcripts
- If a lien was filed and resolved, the Certificate of Release of Federal Tax Lien or Certificate of Subordination. Without it, the underwriter cannot clear title.
Most lenders verify your tax situation independently through the IRS Income Verification Express Service, which returns transcripts electronically within hours.11Internal Revenue Service. Income Verification Express Service for Participants The lender typically runs a final check shortly before closing. A missed IRS payment between application and closing will derail the loan.
Interest and Penalties Keep Running
An installment agreement doesn’t freeze your balance. Interest keeps accruing at the federal short-term rate plus 3%, compounded daily. A failure-to-pay penalty also runs at 0.25% per month, reduced from the standard 0.5% because you’re on an approved agreement.12Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges Your balance can grow in the early months even while you’re paying on time. Build those costs into your homebuying budget alongside the down payment and closing costs.
Steps to Take Before You Apply
Borrowers who close smoothly on conventional loans with back taxes owed are the ones who handle the IRS side first and the mortgage side second.
- Search public records in the county where you plan to buy for any filed federal tax liens. If one exists there, the installment-agreement route alone won’t work.
- Set up the installment agreement early. Apply online if you owe $50,000 or less, and choose direct debit for the lowest setup fee and the best position if you later need a lien withdrawn.
- Make at least one payment on the agreement, on time, before you close.
- Pull your credit reports and address any collections or late payments tied to the tax situation before applying.
- Run the DTI math. Add the IRS monthly payment to your existing debts and proposed mortgage. If you’re above 45%, pay down revolving debt or reset your price range.
- Gather the approved agreement letter, the most recent IRS payment reminder, and your account transcript before you sit down with a lender.
Tax debt is common among mortgage applicants, and lenders have a defined process for it. What underwriters need is documentation that lines up with the guidelines. Get the paperwork in order before anyone pulls your file, and a conventional loan is a realistic option.