How a Tax Lien Could Impact Your Home Refinance Options

Tax liens lower the odds of selling or refinancing a home. The government files a lien to officially make a legal claim against a home as a payment or collateral for tax debt. It notifies other creditors that the government has a legitimate right on the home until all the owed tax debts are cleared.

Placement of a lien on a home can hurt the homeowner’s credit report and prevent him or her from meeting the eligibility criteria of a refinance loan. Nowadays, public records like liens are part of credit reports. What’s more, instead of the loan earnings going to the homeowner, they might go to the federal government.

Addressing the Lien 

Paying Taxes with Home Equity

If the homeowner agrees to pay off the outstanding taxes using home equity, the federal government may subordinate the lien to allow home refinance to proceed. Lien subordination places other creditors on top of the IRS, but it doesn’t get rid of the lien.

Paying the Tax Debt in Full

Paying the owed tax debts in full is the most effective way to remove a lien on a home. The IRS often lifts the lien within 30 days after the debt payment.

Applying for the Withdrawal of the Lien

A lien withdrawal lifts the public Notice of Federal Tax Lien and indicates that the IRS isn’t contending with other creditors for the home. The owner, however, is still legally responsible for the debt. The owner must make a lien withdrawal application, and then the IRS will decide whether he or she is eligible.

The IRS may require the owner to initiate payment installments and have them deducted directly from his or her bank account. He or she must owe less than $25,000 and can repay within 5 years to increase the chances of qualifying for lien withdrawal. Following a successful lien withdrawal, notifying the major credit-reporting bureaus is crucial. These bureaus will then confirm lien removal and delete it from their files, preventing it from appearing in future credit reports.

Liens significantly affect home refinance options but they don’t disqualify a homeowner from loans while he or she is repaying the owed debt.  By approaching the IRS, coming up with appropriate payment plans, and staying committed to paying off the tax debt, a homeowner can still refinance his or her home.