The good news is that the IRS has absolutely no authority over the lenders whose business it is to decide whether or not you are eligible to buy a home. The bad news is that the money you owe the IRS could impact your loan application in other ways that you haven't yet anticipated. Before you apply for a loan, it is important that you understand how recent changes in the lending process make owing a debt to the IRS a serious threat to the likelihood that you'll get approved for a loan.
Although the money you owe the IRS is somewhat connected to a few of the key indicators – such as debt ratio, age, credit, asset to liability - used to determine if you qualify for a home loan, the decision remains with your lender. This is not to say, however, that the money you owe the IRS won't negatively impact your loan application.
Although you can technically buy a home if you owe money to the IRS, you may have trouble selling the home you already have. Why? The IRS may have already issued a lien on your current home, which sometimes creates a sense of alarm among potential buyers. The reticence to purchase a home with a tax lien is first and foremost due to the fact that an IRS lien is primary, whereas all other creditors are secondary. Upon the sale of the home, the IRS will undoubtedly take from the sale the amount you owe and leave the remainder for the buyer. But since the buyer is unaware of how much you owe, he could be left with less money than anticipated when the transaction is complete. To request that the IRS remove itself as primary creditor, complete IRS form 14134 to request a subordination of the tax lien. Generally, the IRS does not approve a subordination of tax lien unless it stands to benefit from the subordination. For example, if you can demonstrate that the subordination is needed to refinance your home loan, and that you intend to use the money to pay your IRS bill, then you stand a chance of getting your subordination approved.
Once the IRS issues a lien on your home, your credit may be affected. If the lien reduces your credit score, lenders may be reluctant to provide you with the financing required to purchase a new home. And filing an installment agreement with the IRS does not prevent it from placing a lien on your home, since the purpose of a lien is to ensure the IRS interest in your home, not seize the home.
After the housing bubble burst in the late 2000s, many lenders adopted stricter criteria for home mortgage applications. There are now far fewer subprime lenders and most lenders now require that you have excellent credit and prove your income by supplying income statements.