How to Refinance with a Tax Lien
A tax lien on your property makes tax lien refinancing complicated at best, and often unattainable at all.
The tax lien must be resolved and removed, or a request for the lien to be made secondary to the loan on the property may be submitted to the IRS.
It’s common for taxpayers to have at least one mortgage loan, with many also having a second or third loan on the same property.
Mortgage loan repayments are organized based on their place in line. The first mortgage holder has the first right to any proceeds, the second mortgage company is next, and so on.
The IRS is waiting in line behind all the prior mortgage holders for payment.
The problem with this situation comes when you want to refinance the mortgage.
The intention behind refinancing is to pay off the old mortgage holders with the loan from the new mortgage holder.
A refinance is usually done at a lower interest rate, so you end up with the same amount of debt financed, but at a lower rate.
Since the IRS is still in line, paying off the old mortgage lenders moves the tax debt to the first position of the line, before any new mortgage lender.
Many mortgage companies aren’t open to this because the second position is at an increased risk of default.
In other words, if the IRS were to foreclose on your property, the mortgage company in the second position could end up with no repayment after the tax lien is satisfied.
Mortgage lenders commonly hesitate writing loans if they’re not in the first position for this reason, which results in a rejection of your refinance application.
What can you do?
Ideally, the IRS will agree to keep its subordinate position, so that the primary mortgage holder gets the priority.
To achieve this, ask the IRS to grant you a Certificate of Subordination.
The IRS will usually agree to this if they get paid a share of the proceeds at closing. Here’s an example of how this could work:
Your home is worth $220,000 and you want to refinance from a 7.5% interest rate to a 5.25% rate.
The refinance would reduce your monthly mortgage payment by about $325, making the refinance a sound financial decision.
Say you have $50,000 in equity built up in your home and you have a tax lien of $55,000. Now things get complicated.
The IRS will agree to a subordination if they receive the proceeds at closing. In this scenario, the IRS will generally expect to be paid the full $50,000 and will subordinate the remaining $5,000.
This is beneficial for the taxpayer in a few ways. First, the tax liability is reduced to $5,000 and the higher IRS interest on the $50,000 you paid off will be saved.
Second, the taxpayer will be paying a much lower interest rate on the mortgage, which means you will have an extra $325 a month to pay off the remaining $5,000 in back-tax debt more quickly, saving interest there, as well.
In some cases, you may be able to consolidate all your debt into one new mortgage and use your equity to pay the back-tax debt in full, as well as extend your mortgage payments for 15 or 30 years.
The IRS generally expects to be paid off in less than five years regardless of the length of the mortgage loan.
What if I have no Equity?
The IRS may agree to subordinate your back-tax debt, even if you have little or no equity in your home if your current mortgage has a high interest rate.
By refinancing at a lower interest rate, you would have a considerably lower mortgage payment.
If you can demonstrate to them that the lower monthly mortgage payments will allow you to pay more each month toward your back-tax debt, they’re more likely to agree to subordinate the debt.
Tax Champions is experienced in negotiating Certificates of Subordination with the IRS.
We’ve been saving our clients the difficult work of securing settlements with the IRS during the refinance process for over 35 years. We offer a free consultation to confidentially discuss the options that you qualify for.
Call us today at 800.518.8964 to speak with one of our knowledgeable tax professionals.
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Sources
[1] What if there is a federal tax lien on my home? (2019, January 31). Retrieved from //www.irs.gov/newsroom/what-if-there-is-a-federal-tax-lien-on-my-home
